Self-employed net income for affordable housing - valid to take from profit/loss?

Question

I'm trying to understand net income from self-employment, when qualifying for an affordable housing program.

I had always thought that net income was the cash (checks, wires, etc) coming in. However, it seems that for self-employment, it's profit-loss, to quote:

Income from a Sole Proprietorship (for Self-employed) MOHCD will use a P&L statement for a self-employed applicant to determine an applicant’s business income for the current year.

MOHCD will use the following steps to calculate an applicant’s Income from a P&L statement:

Step 1: Use the YTD net profit shown on the P&L statement, adding back any of the allowable adjustments used in analyzing the tax returns for the business, such as non-recurring loss and expenses, depreciation, depletion, and amortization and casualty loss (the result of step 1 is the YTD adjusted Gross Income).

Step 2: Divide the adjusted Income by the number of months on the P&L statement to get the average monthly income. Multiply this number by 12 to annualize.

 Example: Calculating Income with P&L Statement:
 YTD net profit as stated on P&L statement = $20,000
 Allowable adjustments = $10,000
 YTD adjusted Gross Income = $30,000 ($20,000 + $10,000)
 Number of months = 10
 Average monthly income = $3,000 ($30,000 divided by 10)
Annualized income = $36,000 ($3,000 x 12)

To qualify for affordable housing, one must have an income of at least $31,500 but less than $42,000.

Does this mean that if someone makes $1M per year on self employment but has expenses of $965,000 or so that their net income is only $35,000... then even a self-employed millionaire would qualify for affordable housing programs (Below Median Rent)?

Answer 1

Yes, self-employment income is the net (income - expenses) from the self-employed activity. Note that "from the self-employed activity" is important here. When you're self-employed, you need to separate expenses between business expenses and personal expenses and you'd only deduct business expenses from business income. You don't deduct personal expenses. That's the fairest way to do things.

Take two people in basically the same financial position running a small coffee shop. Person A is employed by a company that rents the space, buys all the supplies, and maintains the machines, hires staff, etc.. Person A makes a salary of $35,000.

Person B owns the coffee shop across the street. She rents the space, buys all the supplies, maintains all the machines, hires staff, etc. The business generates income of $1,000,000 a year but $965,000 of that immediately gets spent on rent, salaries for employees, coffee and other supplies, etc. At the end of the day, B distributes the remaining $35,000 to herself to live on. Treating the whole $1 M as income to B when 96.5% of that revenue was spent by the business would paint an unfair picture of what B is really earning.

In both cases, A & B are taking home exactly the same amount of money (assuming that B's self-employment tax is paid out of the business's "salaries" pot). They have exactly the same amount of money to live on. So it would generally be reasonable to treat them identically. Calling B a "self-employed millionaire" because the business had sales of $1 M would generally be misleading-- that's not what "millionaire" means in normal conversation.

Of course, if B owns a business, she likely has a significant amount of assets (as opposed to income). Most government assistance programs are going to have asset tests in addition to income tests so that if you have a $1 M home or a $1 M business you're going to be ineligible regardless of your income and regardless of the source of your income. If Bill Gates has $35,000 in income for the year, it is incredibly unlikely that he would qualify for any assistance program because of his assets. The same would generally happen to A if A owned $1 M in stock despite his relatively low income.