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(a) In order to determine whether nonpersonal costs of doing business may be deducted from gross income under this section, particularly if a contract relationship exists, the department will determine whether an individual is self-employed or working as an employee by considering an individual to be
(1) self-employed if the individual has a business license to engage in that work, as required by AS 43.70, or any other license, permit, or certificate necessary to perform that work as required by a state or local government;
(2) self-employed if that individual files annual federal tax returns showing that the income is from self-employment; or
(3) working as an employee if another individual or business is responsible for providing worker's compensation insurance, making FICA contributions, or completing and submitting federal income tax withholding forms.
(b) The gross monthly earned income of an individual who is self-employed is the total amount of money received, or expected to be received during a month, from self-employment after the non-personal costs of doing business allowed under this section are subtracted. If a self-employed individual also has unearned income or income earned as an employee, the gross monthly amount of this income is not added to the gross monthly earned income from self-employment.
(c) Unless otherwise provided in this section, non-personal costs of doing business that may be deducted must be identifiable and must be reasonable and necessary. Non-personal costs of doing business include payment of interest on business loans; rent of business property; utilities; heat; taxes on business purchases if not already included; maintenance and repair of rental property if necessary to keep the property rented; bookkeeping costs; costs of merchandise, tools and equipment necessary to produce income; wages and benefits paid to employees; and the direct costs of reasonable and necessary non-personal transportation.
(d) For a self-employed fisherman, the identifiable costs of doing business that are reasonable and necessary include the cost of boat engine fuel; boat engine oil; boat and motor repairs; normal boat and motor maintenance; rain clothing; bait; commercial fishing license; employee labor costs; replacement or repairs of all types of fishing nets, not including lead line or float line; year-round boat moorage fees, including boat stall and grid fees; and utility costs to maintain the vessel during the nonwork season. The department will consider a crew member receiving a share of the profit to be self-employed and a crew member receiving a wage to be an employee.
(e) Non-personal costs of doing business do not include loan payments on the principal of a loan to purchase capital assets, equipment, machinery, and other durable goods. However, if such goods are purchased on an installment plan, the interest paid as part of each installment payment is deducted.
(f) An amount claimed as depreciation or a loss for federal income tax or other purposes, the cost of personal and business entertainment, and the cost of personal transportation, are not considered non-personal costs.
(g) For the purposes of this section, a payment on the principal of a real estate mortgage on income-producing property is not a non-personal cost of doing business. However, interest paid on an installment contract for the purchase of income-producing property, and the tax paid on that property, are considered non-personal costs. For a family whose mortgage payment represents an investment in income-producing property, the interest portion of that mortgage payment, the tax on that property, and any other identifiable expenses are considered non-personal costs if the individual can separately identify those costs that apply to the portion of the property used in the self-employed enterprise.
(h) Regardless of whether a self-employed individual receives income monthly or less often than monthly, the non-personal costs of doing business allowed under this section are deducted from the income received even if those costs are incurred while the individual is not actually working, or are received in a month in which there is no prorated income. For example, January boat storage fees and engine repair bills are allowed as non-personal costs of doing business, even if the boat only produces income in June.
(i) For a self-employed individual receiving income less often than monthly, the allowable, reasonable, and necessary costs of doing business are calculated prospectively on a calendar-year basis. The annual anticipated total of non-personal business costs is subtracted from the anticipated annual gross income from self-employment. The resulting adjusted gross income, is then prorated in accordance with 7 AAC 45.450. This is the monthly income from which disregards are subtracted under 7 AAC 45.470(b) in the months of actual work.
(j) For the purpose of anticipating future gross and adjusted gross self-employment income, the department will use the prior year's actual income for an applicant who applies before or during the current self-employment period, or the current year's actual income for an applicant who applies after the current self-employment period. When the self-employment enterprise has existed for less than a year, the department will average the past income and project that average to the coming year. If a major change in an individual's circumstance has occurred that indicates that the income of the previous year will be substantially different from that of the coming year, the department will estimate future income by using the applicant's own estimates, and additional information or projections from other individual or governmental sources.
(k) For an individual who receives self-employment income monthly or more frequently than monthly, the anticipated allowable costs of doing business for the month are added to any allowable costs that occur in some other month but that are costs that also apply to the month being anticipated. For example, a salesperson who sells year-round may deduct in August 1/12 of the cost of an annual business license purchased in January.
History: Eff. 8/5/92, Register 123; am 10/1/97, Register 143; am 1/7/2005, Register 173
Authority: AS 47.05.010
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Last modified 7/05/2006