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

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
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)?

• Do not confuse sales with profit. Your 3.5 % profit-to-sales ratio is e.g. typical for retail stores in Germany. As a grocery store owner, you'd maybe spend each day on average ≈3860 € on goods and running expenses, have a stock of maybe 10 - 15 k€ and have average sales of 4 k€. So average profit per day would be 140 €. Over 250 opening days per year, you'd earn 35 k€. (I'm not a native speaker, but I'd have described this as making 35 k rather than making 1 M). Note that neither are they likely to be asset millionaire - their stock is only a few days' sales. Dec 19, 2018 at 19:04
• Okay, so I'm not a store - though I wish I had an easier case... I'm an independent software developer who spends most of her time working on art. I win a lot of contests and won about \$32,000 in contests. However, I do have living fees that that is deducted from - and I also travel.
– ina
Dec 20, 2018 at 1:09
• I'm also closer to your scenario than to the store owner. Anyways: business expenses are what the business needs to work: if you travel to meet a customer that's a business expense. Your own living, however, is not (similar to an employee who has to pay for their food from their salary). What you are allowed to subtract as business expense will depend on your legislation (I'm not in the US and never ran a business there, so don't know details). E.g. I can deduct a new computer only if it is clear that it is used exclusively for business. Dec 20, 2018 at 17:26
• Oh, and I don't know how it is in your region, but over here e.g. the chamber of commerce sometimes has rather informative crash courses on these things, and also startup initiatives at/close to universities have informative zero to low cost short courses on such practical accounting questions. Definitively worth while looking into, I'd say. Dec 20, 2018 at 17:28

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.

• I'm not sure what salary refers to in self-employment. For self employment, pretty much most expenses are living expenses, from the food that you eat to the transportation that gets you places.
– ina
Dec 19, 2018 at 4:15
• @ina - If you're self-employed, living expenses, food, and transportation are definitely not business expenses, they're personal expenses. You only deduct business expenses from business income to determine your self-employed income. That's the income that you can use to pay for your personal expenses. Dec 19, 2018 at 4:23
• I was told that if I work during lunch or hold meal-related meetings, then it is a business expense.
– ina
Dec 20, 2018 at 1:09
• @ina - If you're taking prospective clients out to dinner to talk about a potential business opportunity and paying for everyone's meals, that is potentially 50% deductible as a business expense (though that is subject to change over time). If you're just buying yourself lunch and eating while working, that's not going to be deductible. Of course, this can quickly get complicated which is why most self-employed folks work with accountants to make sure they're deducting things appropriately Dec 20, 2018 at 1:26
• Oh, where is the 50% from?
– ina
Dec 20, 2018 at 1:53