1. Self-Generated Income Part 1: Understanding Tax Forms

2. Part 1 Goals (75 Minutes to):
Provide a better understanding of WHEAP SGI income policies
Gain a basic knowledge of self-employment business structures
Have the ability to identify the types of tax forms necessary to calculate income
Answer ALL of your SGI questions (psych)
Take a breath once or twice

3. A BRIEF Overview of Policy
It’s all in a name change
Self-Employment income has been renamed as Self-Generated Income (S-GI) to better describe the various ways applicants earn income through means other than regular employment.
The Self-Employment Income Type code (SE) though is still used for S-GI.

4. A BRIEF Overview of Policy
The Self-Generated Income type is evaluated based upon one of the following:
the prior year’s taxes,
the last 12 months, or
the duration the business has operated if it has operated for less than 12 months

5. A BRIEF Overview of Policy
Most self-generated income fluctuates throughout the year, with natural busy and slow seasons (such as home construction).
Because of this, policy has a worker take the income for the past 12 months and convert it into a monthly average.
If the business was in operation for less than 12 months, divide by the number of months in operation.

6. A BRIEF Overview of Policy
Example 1:
John operates a construction business.
His income earnings are from April – October.
He applies for WHEAP in February
According to the 1040 and Schedule C, John had net self-employment earnings of $19,468 in the prior year.
The worker divides that amount by 12 and calculates a $1, monthly average income.

7. A BRIEF Overview of Policy
Net vs. Gross Earnings for SGI
The manual states in to budget the net income for self-generated income when using tax forms.  
If tax forms are not used to calculate self-generated income, the gross income must be used in the WHEAP calculation.

8. A BRIEF Overview of Policy
S-GIRF (Self-Generated Income Report Form)
If the applicant did not file taxes, a Self-Generated Income Report Form (S-GIRF) must be used to report income.
The applicant must report gross income on the S- GIRF and is not allowed to deduct expenses from the gross receipts of their self-generated income activity.

9. A BRIEF Overview of Policy
S-GIRF (Self-Generated Income Report Form)
S-GIRFs should be utilized in the following situations:
The individual did not file taxes;
The business was not in operation during the prior tax year;
The application filed for Chapter 7 bankruptcy since the last tax forms were filed.

11. A BRIEF Overview of Policy
S-GIRF (Self-Generated Income Report Form)
In situations where the S-GIRF reflects zero income and there is no other income source in the household, a notary public witness must validate the application signature.
This should not be as common since an applicant can no longer claim expenses on the S-GIRF (like they did in prior years).

12. A BRIEF Overview of Policy
Income Offsets
Loss from self-generated income can be used to offset income from another self-generated income (self-employment) business. But, SGI loss cannot be used to offset other income in the household.

13. A BRIEF Overview of Policy
Income Offsets
Example 2: Monique operates two businesses.
She had a net loss from her craft business of $2,454 and a net profit of $5,988 from her E-bay store.
Her net annual self-employment business income is $3,544 which converts to a $ monthly income. The Craft business is entered with a $0 and E-bay with $ in the WHEAP System.

14. A BRIEF Overview of Policy
Income Offsets
Example 3: Anthony works full-time at Acme Acres with a monthly income of $1,650.
He also operates a small farm that reflected a loss of $9,255 last year.
The earned income is posted as $1,650 and the SGI as $0 in the WHEAP System as the self- generated income loss cannot offset the wages.

15. A BRIEF Overview of Policy
Self-Employment Wages
Self-employment wages (as reported on a W-2 Form and entered on Line 7 of the 1040) are calculated like SGI income – meaning they are annualized.
The worker takes the annual wage amount and divides by 12 to determine the monthly income. The worker should use the individual’s W-2 wage statement for the calculation.

16. A BRIEF Overview of Policy
Self-Employment Wages
Example 4: Mark has a construction business.
He pays himself wages when working.
Enter net income from the Schedule C as “SE” income the WHEAP system.
Take the wages reported on the W-2 form and divides by 12 and enters as “W” wage income in the WHEAP system.

17. A BRIEF Overview of Policy
Guaranteed Payments for Partners
Guaranteed Payments are essentially wages for partners as under that business structure they cannot pay themselves direct wages.
GP are reported on the K-1, line 4.
Annualize the GP and divide by 12.
Enter that monthly amount as “W” wage income in the WHEAP system.

18. A BRIEF Overview of Policy
Business Use of Home
When the self-employment business is operated in the applicant’s home, workers are not to count the room(s) that is used for business purposes when entering the number of rooms for the residence under Question #10 in the WHEAP System.

19. A BRIEF Overview of Policy
Business Use of Home
Example 1 continued:
John uses a spare bedroom in the home as his business office for his construction business. That room should not be included in the WHEAP calculation. Verification of business use of the home can be via Form 8829.

20. Business Structures & Tax Forms
Sole Proprietorship
A type of business which has no legal separate existence from its owner.
Income and expenses from the business are reported on the personal tax return of the owner via Schedule C-EZ, C, E, or F.
Sole proprietorships can have employees, offer health insurance and have an FEIN.

21. Business Structures & Tax Forms
Partnerships
A legal entity where two or more individual form a legal structure to share the costs and profits of a business.
The partnership business entity does not pay taxes, though it must file a tax return form.
Each partner receive a K-1 which is reported on Schedule E for net income.

22. Business Structures & Tax Forms
Limited Liability Company (LLC)
An LLC is a legal designation to provide some protection to the owners of a business.
Both a sole proprietorship and a partnership can become an LLC and remain taxed as they would without being an LLC.
LLC status is not relevant for WHEAP.

23. Business Structures & Tax Forms
S-Corporations
An LLC can choose to be taxed as a corporation and file a separate informational tax return.
Like a partnership, each owner receives a K-1 form to transfer to the Schedule E to report net business income.

24. Business Structures & Tax Forms
Corporations
Business structures with shareholders as owners and has a board of directors.
The corporation pays taxes on its income and profits are distributed via dividends, royalties, and capital gains.
That income is reported on the 1040 on lines 9 and 13.

25. Business Structures & Tax Forms
In summary, the Tax Forms used for WHEAP:
1040 Federal Return Form
Schedule C or C-EZ
Schedule F: Farm
Schedule E, Part 1: Rental
Schedule E, Part 2: Partnership/S-Corp
K-1 for the 1065 Partnership Return
K-1 for the 1120S S-Corp Return
Form 8839: Business Use of Home

26. Understanding Tax Forms
1040 Individual Income Tax Return
Regardless of the business structure, the form must be received for WHEAP.
A worker must look on the 1040 for sources of business income as well as wages that may be received by the group.

27. Understanding Tax Forms
1040 Individual Income Tax Return
Lines 12, 17, and 18 list regular business income.

28. Understanding Tax Forms
1040 Individual Income Tax Return
The worker must compare the business income figures listed on the 1040 with the appropriate schedules to ensure all SEI income is reported to the agency and all schedules have been submitted.
Each business must be listed separately in the WHEAP system.

29. Understanding Tax Forms
1040 Individual Income Tax Return
Look at lines 12, 17, and 18 for income entries. Review all the schedules to ensure the net profit/loss amounts match the 1040 entries. If they don’t, there is likely missing schedule(s) or forms that have to be requested.

30. Understanding Tax Forms
1040 Individual Income Tax Return
In this example, there was a second income source. The two schedules’ net income total the amount on Line 12 of the 1040.

31. Schedule C-EZ
Look to determine if there is more than one owner (joint return, and both own the business).
Line 3 is directly transferred to Line 12 on the 1040.

32. Schedule C
Look to determine if there is more than one owner (joint return, and both own the business).
Line 26 indicates if wages were paid. If there is an amount listed, the worker needs to determine if wages were paid to the owner and therefore must be entered separately from the SEI. .
Line 30 will indicate if there is a claim of business use of the home.
Line 31 is directly transferred to Line 12 on the 1040.

33. Schedule F
Look to determine if there is more than one owner (joint return, and both own the business).
Line 34 is directly transferred to Line 18 on the 1040.

34. Understanding Tax Forms
Schedule E, Part 1:Rentals
Used to report rental income for sole proprietorships. The net income from E, line 26 is transferred to Line 17 on the 1040 form if the only income type on the schedule is rental income. If there are also other income types listed in Part II, III, or IV, the net rental income is included on Line 41(on the second page of the Schedule E) before being transferred to Line 17 on the 1040.
Rental Income is coded separately in the WHEAP system. Instead of being coded as “SE” for self-employment is it coded as “R” for rental income

35. Schedule E Part 1: Rental
Often Schedule E lists both names on joint returns. Ask the applicant if both individuals are in fact owners.
Each rental property is individually listed on the Schedule E. The rental income and expense are combined to a net rental income total on line 26. A worker only needs to make one entry in WHEAP for rental income based upon Line 26, even if there is more than one rental property.

36. Understanding Tax Forms
Schedule E, Part 2: Partnerships/S-Corps
Part II of Schedule E is used to report income from Partnerships and S-Corporations. The net income from E, line 32 is carried down to Line 41 and then transferred to Line 17 of the 1040.
Partnerships and S-Corporations file informational income returns to the IRS and issue K-1 income reports to be filed with a person’s individual tax return. The individual has income allocated based upon the percent of ownership they hold for the business.

37. Understanding Tax Forms
Schedule E, Part 2: Partnerships
Partnerships often distribute Guaranteed Payments to the partners, which is a form of salary. It is counted as an expense from the business income but is added back as income on the K-1 and included on the Schedule E.
Guaranteed Payments are not budgeted separately as wages for WHEAP.

38. Schedule E, Pt II Partnership K-1 (for 1065)
Line 28 is broken down into 10 sections for up to 4 businesses. Column 2 identifies if the business is a Partnership (P) or S-Corp (S)
There are also separate sections for Passive and Non-Passive Income/loss.
Passive = Unearned
Non-Passive = Earned
WHEAP System Coding:
Line 1: SE income type
Line 2/3: R income type
Line 4: W income type
K-1: Normal business income from business- related activities are listed on Lines 1 – 4, although other income types are also listed for lines 5 – 11.

39. Schedule E II K-1 for S-Corp WHEAP System Coding:
Line 1: SE income type
Line 2/3: R income type
The K-1 for S-Corporations is slightly different than the K-1 for Partnerships. The key difference is there are no Guaranteed Payments.
Line 1 income is usually earned/non- passive income.
Line 2 and 3 are Rental income so should be coded with “R” in the WHEAP system separate from the other earnings.

40. Understanding Tax Forms
Although not specifically identified in WHEAP policy, Form 8829 can help a worker verify the amount of space used for business the applicant’s home when the business is reported on Schedule C.
Business use of the home calculations are not made for other business types. Ultimately, the worker needs to ask the applicant which rooms are used for business and not include those in the WHEAP calculation.

41. Form 8829
The 8829 identifies the percentage of the home that was used exclusively for business use.

42. Whew – time for a break!