DEPARTMENT OF health and social services

Division of Social Services

Statutory Authority: 31 Delaware Code, Section 512 (31 Del.C. §512)

FINAL

ORDER

Self-Employment Income

Nature of the Proceedings

Delaware Health and Social Services (“Department”) / Division of Social Services / Division of Medicaid & Medical Assistance initiated proceedings to amend several policies in the Division of Social Services Manual (DSSM) as it relates to implementing a simplified way to calculate self-employment income. The Department’s proceedings to amend its regulations were initiated pursuant to 29 Delaware Code Section 10114 and its authority as prescribed by 31 Delaware Code Section 512.

The Department published its notice of proposed regulation changes pursuant to 29 Delaware Code Section 10115 in the August 2005 Delaware Register of Regulations, requiring written materials and suggestions from the public concerning the proposed regulations to be produced by August 31, 2005 at which time the Department would receive information, factual evidence and public comment to the said proposed changes to the regulations.

Summary of Proposed Changes

Citations

• Section 812 of the Personal Responsibility and Work Opportunity Reconciliation Act (PRWORA) of 1996;

• 7 CFR 273.11(a)(2)(i); and,

• 7 CFR 273.2(b)(3)(v).

1. Instead of detailing each cost of doing business, Delaware proposes to mandate a flat percentage deduction of 44 percent to gross self-employment income as the cost of producing income. The 44 percent flat rate applies to all self-employment income cases for all assistance programs, including Cash Assistance, Child Care, Food Stamps and applicable Medical Assistance Programs.

2. The standard will be updated annually to reflect changes in the economy and the cost-of-living adjustment (COLA).

3. The standard deduction reflects an average of the self-employment costs which is 44 percent.

4. The change shall also be applied to ongoing cases at the time of the next review/redetermination or interim change involving the affected policy unless otherwise indicated.

Summary of Comments Received with Agency Response

The State Council for Persons with Disabilities (SCPD) provided the following observations and recommendation summarized below. DSS and DMMA have considered each comment and responds as follows:

This simplified approach may benefit the Division since it should result in less paperwork and acquisition of business records, receipts, etc. It may also benefit consumers who will not have to produce as many records. However, a one-size-fits-all approach may be disadvantageous for self-employed persons who have above average costs (aka outliers). For example, a start-up business would generally be characterized by higher costs as initial inventory is acquired and business infrastructure developed. To reconcile these competing considerations, SCPD recommends authorization of a limited exception from application of the flat rate.

Some variation of the following provision could be adopted:

An exception to application of the standard deduction is authorized only for self-employed households who produce clear and convincing documentation that application of the standard deduction results in gross understatement of costs of at least 20%. In such circumstances, the documented costs may be substantiated for the standard deduction.

This provision would deter “quibbling” since the disparity must be gross. Moreover, the standard of proof justifying the exception is substantial, i.e., clear and convincing documentation. Finally, the incidence of “outliers” is probably low so program administration would not be burdened with a large number of requests for exceptions.

Agencies Response: DSS and DMMA have made the decision to implement the original flat rate deduction for all self-employed households. This policy change requires a waiver. The 44% deduction is based on the self-employment data that the households use. As with any waiver, approval is dependent on using a deduction figure that will be cost neutral for the Food Stamp Program. The flat rate deduction is similar to the standard earned income deduction applied to all working households regardless of their expenses.

DSS and DMMA expect that streamlining the verification process for self-employed individuals in this manner will result in improved customer service in the application process.

Findings of Fact

The Department finds that the proposed changes as set forth in the August 2005 Register of Regulations should be adopted.

THEREFORE, IT IS ORDERED, that the proposed regulation to amend the Division of Social Services Manual (DSSM) as it relates to implementing a simplified way to calculate self-employment income is adopted and shall be final effective October 10, 2005.

Vincent P. Meconi, Secretary, DHSS, 9-13-05

DSSM: 4004.1, 9074.2, 9075, 11003.9.1, 20210.16, 15120.2, 16230.1.2 and 17300.3.2.4.1

DSS FINAL ORDER REGULATIONS #05-56

REVISIONS:

CASH ASSISTANCE

4004.1 Sources of Earned Income

1. Wages – Gross earnings paid to the employee before deductions for taxes, FICA, insurance, etc. are counted. Sick pay or vacation pay is considered as a wage as long as it is paid as a wage. If sick pay is paid through an insurance company as disability pay, it is considered unearned income.

NOTE: Earnings paid to employees under contract are averaged over the number of months covered by the contract. EXAMPLE: A teacher is under contract for a full calendar year, but may choose to collect his pay during the school year. His wages for public assistance purposes are budgeted over the full year.

2. Self-employment – Gross earned income from self-employment is determined by subtracting business expenses (supplies, equipment, etc.) from gross proceeds. The individual’s personal expenses (lunch, transportation, income tax, etc.) are not deducted as business expenses but are deducted by using the standard allowance for work connected expenses (See DSSM 4004.2 and 4004.3).

Self-Employment Standard Deduction for Producing Income

The cost for producing income is a standard deduction of the gross income. This standard deduction is a percentage of the gross income determined annually and listed in the Cost-of-Living Adjustment (COLA) notice each October.

The standard deduction is considered the cost to produce income. The gross income test is applied after the standard deduction. The earned income deductions are then applied to the net self-employment income and any other earned income in the household.

The standard deduction applies to all self-employed households with costs to produce income. To receive the standard deduction, the self-employed household must provide and verify [it has they have] business costs to produce income. The verifications can include, but are not limited to, tax records, ledgers, business records, receipts, check receipts, and business statements. The self-employed household does not have to verify all [its their] business costs to receive the standard deduction.

Self-employed households not claiming or verifying any costs to produce income will not receive the standard deduction.

The self-employment standard deduction will be reviewed annually to determine if an adjustment in the percentage amount is needed.

Self-employed persons must submit evidence of gross proceeds and business expenses or income tax statements to verify earnings.

3. Farming - Farming is defined as raising crops, livestock, or poultry for profit. Gross earned income from farming is determined by subtracting the farmer’s operating expenses from sales. Produce grown for home consumption is not considered income.

4. Room and Board Income – [See 4006 for treatment of cash payments for shared living expenses.] Income from the operation of a rooming and/or boarding home is considered earned income. The following disregards are deducted from gross proceeds as operating expenses. These expenses are deducted before any earned income disregards are subtracted from income.

Roomers only – subtract $10.00 per month per person. (A roomer is a person who rents living space in the home.)

Boarders only – subtract $30.00 per month per person. (A boarder is a person who purchases meals provided in the home, but does not live there.)

Roomers and Boarders – subtract $46.00 per month per person. (A roomer and boarder does both.)

EXAMPLE: An individual operates a rooming and boarding home. She has three (3) roomers who each pay $60.00 per month and two (2) roomers and boarders who each pay $100.00 per month.

$180.00 -Payment from roomers $60 x 3

-30.00 -Disregards for roomers $10 x 3

$150.00

$200.00 -Payment from roomers and boarders ($100 x

-92.00 -Disregard for roomers and boarders ($46 x 2)

$108.00

$150.00

+108.00

$258.00 Total gross income from roomers and boarders

(Earned income disregards appropriate to the category of assistance are subtracted in the budgeting process. See DSSM 4004.2 and 4004.3).

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FOOD STAMPS

9074.2 Allowable Costs of Producing Self-Employment Income

(1) Allowable costs of producing self-employment income include, but are not limited to:

· The identifiable costs of labor;

· stock;

· raw material;

· seed and fertilizer;

· payments on the principal of the purchase price of income-producing real estate and capital assets, equipment, machinery, and other durable goods;

· interest paid to purchase income-producing property;

· insurance premiums; and

· taxes paid on income-producing property.

(2) The following items are not allowable costs of doing business:

· net losses from previous periods;

· Federal, State and local income taxes, money set aside for retirement purposes, and other work-related personal expenses like transportation to and from work. (Work-related personal expenses are covered under the 20 percent earned income deduction.)

· depreciation; and

· any amount that exceeds the payment a household receives from a boarder for lodging and meals.

(3) Calculate the costs of producing self-employment income using the actual costs according to (b)(1) or determine self-employment expenses as follows:

· For income from day care, use the current reimbursement amounts used in the Child and Adult Care Food Program.

· For income from boarders, other than those in commercial boarding houses or from foster care boarders, use the maximum food stamp allotment for a household size that is equal to the number of boarders.

· For income from foster care boarders, refer to DSSM 9013.1.

9074.2 Self-Employment Standard Deduction for Producing Income

The cost for producing income is a standard deduction of the gross income. This standard deduction is a percentage of the gross income determined annually and is listed in the Cost-of-Living Adjustment (COLA) notice each October.

The standard deduction is considered the cost to produce income. The gross income test is applied after the standard deduction. The 20% earned income deduction is then applied to the net self-employment income and any other earned income in the household.

The standard deduction applies to all self-employed households with costs to produce income. To receive the standard deduction, self-employed households must provide and verify they have business costs to produce income. The verifications can include, but are not limited to, tax records, ledgers, business records, receipts, check receipts, and business statements. The self-employed household does not have to verify all its business costs to receive the standard deduction.

Self-employed households not claiming or verifying any costs to produce income will not receive the standard deduction.

The self-employment standard deduction will be reviewed annually to determine if an adjustment in the percentage amount is needed.

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9075 Procedure for Calculating Income Which Can Be Annualized to Reflect Monthly Calculations

1) Add all gross self-employment (including capital gains) for the period of time over which the self-employment income is determined.

2) Subtract the total cost of producing the income self-employment standard deduction.

3) Divide the income by the number of months over which the income will be averaged.

4) For those households whose self-employment income is not averaged but is instead calculated on an anticipated basis, add any capital gains the household anticipates it will receive in the next 12 months, starting with the date the application is filed, and divide this amount by 12. This amount shall be used in successive certification periods during the next 12 months, except that a new average monthly amount shall be calculated over this 12-month period if the anticipated amount of capital gains changes. Add the anticipated monthly amount of capital gains to the anticipated monthly self-employment income, and subtract the cost of producing the self-employment income. The cost of producing the self-employment income will be calculated by anticipating the monthly allowable costs of producing the self-employment income. self-employment standard deduction.

Calculation I - Gross Income

(a) Anticipated capital gains for 12-month period beginning with date of application.

(b) + Anticipated gross self-employment income.

Calculation II - Costs of Operations

(a) Gross allowable costs of operation.

(b) + Gross depreciation.

Calculation III - Net Self-employment Income

(a) Gross self-employment income.

(b) - Total cost of operation self-employment standard deduction

(d) = Net monthly self-employment income.

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CHILD CARE

11003.9.1 Countable Income

A. All sources of income, earned (such as wages) and unearned (such as child support, social security pensions, etc.) are countable income when determining a family's monthly gross income. Monthly gross income typically includes the following:

1. Money from wages or salary, such as total money earnings from work performed as an employee, including wages, salary, Armed Forces pay, commissions, tips, piece rate payments and cash bonuses earned before deductions are made for taxes, bonds, pensions, union dues, etc.

2. Gross income from farm or non-farm self-employment is determined by subtracting business expenses such as supplies, equipment, etc. from gross proceeds the self-employment standard deduction for producing income as described below. The individual's personal expenses (lunch, transportation, income tax, etc.) are not deducted as business expenses but are deducted by using the TANF standard allowance for work connected expenses. In the case of unusual situations (such as parent/caretaker just beginning business), refer to DSSM 9056 and 9074.

Self-Employment Standard Deduction for Producing Income

The standard deduction applies to all self-employed households with costs to produce income. To receive the standard deduction, the self-employed household must provide and verify they have business costs to produce income. The verifications can include, but are not limited to, tax records, ledgers, business records, receipts, check receipts, and business statements. The self-employed household does not have to verify all [its their] business costs to receive the standard deduction.

Self-employed households not claiming or verifying any costs to produce income will not receive the standard deduction.

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MEDICAID/MEDICAL ASSISTANCE

15120.2 Financial Eligibility

TANF rules on income standards and methodologies (disregards, exclusions, allocations) apply to Section 1931 Medicaid except as provided in this section.

For Section 1931 Medicaid, there are two income tests to determine financial eligibility. The first test is a gross income test and the second is a net income test. For the gross income test, compare the family's gross income to 185% of the applicable standard of need. For the net income test, compare the family's net income to the applicable standard of need.

Financial eligibility for both applicant and recipient families will be calculated using the 30 and 1/3 disregard if applicable. This disregard allows the deduction of $30 plus 1/3 of the remaining earned income after the standard allowance for work connected expenses is subtracted.

The $30 plus 1/3 disregard is applied to earned income for four (4) consecutive months. If Medicaid under Section 1931 or employment ends before the fourth month, the earner is eligible for the disregard for four (4) additional months upon reapplication or re-employment.

When an earner's wages are so low ($90 or less in the month) that the income is zero before any part of the $30 plus 1/3 disregard can be applied, that month does not count as one of the four (4) consecutive months and the earner is eligible for the disregard for four (4) additional months.

After the $30 plus 1/3 disregard has been applied for four (4) consecutive months, the 1/3 disregard is removed from the budget. The $30 disregard continues to be deducted from earned income for eight (8) consecutive months. The $30 disregard is not repeated if an individual stops working or 1931 Medicaid ends before the completion of the eight (8) consecutive months. If 1931 Medicaid ends and the family reapplies, the $30 disregard from earned income is continued until the end of the original eight (8) consecutive months.

Unlike the $30 plus 1/3 disregard which is dependent upon the family having sufficient earned income and being 1931 Medicaid recipients, the $30 disregard is for a specific time period. This time period begins when the $30 plus 1/3 disregard ends and is not dependent upon the family having earned income or 1931 Medicaid.

When an earner has received the $30 and 1/3 disregard in four (4) consecutive months and the $30 deduction has been available for eight (8) consecutive additional months, neither disregard can be applied to earned income until the individual has not received Medicaid under Section 1931 for twelve (12) consecutive months.

All earned income is disregarded for the second and third months of eligibility.

All earned income is disregarded for 12 months after employment causes ineligibility.

A self-employment standard deduction is used to calculate self-employment income. The self-employment standard deduction is considered the cost to produce income. The self-employment standard deduction is a percentage that is determined annually and announced in the Cost-of-Living Adjustment (COLA) Administrative Notice each October.

To calculate self-employment income, use the gross proceeds and subtract the self- employment standard deduction. The result is the amount included in the gross income test (185% of the applicable standard of need). Standard earned income deductions are then applied to the self-employment income for the net income test (the applicable standard of need).

To receive the self-employment standard deduction, the individual must provide verification that costs are incurred to produce the self-employment income. Verification can include, but is not limited to, tax records, ledgers, business records, receipts, check receipts, and business statements. The individual does not have to verify all business costs to receive the standard deduction.

If the individual does not claim or verify any costs to produce the self-employment income, the self-employment standard deduction will not be applied.

Any diversion assistance provided does not count as income.

Resources are not counted for Medicaid under Section 1931.

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16230.1.2 Self Employment

Determine gross earned income from self-employment by subtracting allowable business expenses from gross proceeds. Business expenses are expenses directly related to producing the goods or services and without which the goods or services could not be produced. Allowable business expenses for the eligibility determination do not include all expenses that are allowed by the Internal Revenue Service.

Allowable business expenses include but are not limited to accounting fees, advertising, auto expense for business only, business travel expenses, cost of goods sold, employee wages, excess utilities (if business is in home), food costs for daycare, interest on loans, legal fees, liability insurance, licensing fees, repairs and maintenance.

Business expenses that are not allowable include depreciation, personal and entertainment expenses, personal transportation, purchase of capital equipment and payments on the principal of loans for capital assets or durable goods, rent or mortgage when business is in the home.

16230.1.2 Self-Employment Income

To calculate self-employment income, use the gross proceeds and subtract the self- employment standard deduction. The result is the amount included in the individual’s gross income. Standard earned income deductions are then applied to the individual’s gross income.

If the individual does not claim or verify any costs to produce the self-employment income, the self-employment standard deduction will not be applied.

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17300.3.2.4.1 Self-Employment Income

If the individual does not claim or verify any costs to produce the self-employment income, the self-employment standard deduction will not be applied.

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LONG TERM CARE MEDICAID

20210.16 Self Employment