The Trainer — May 2014
Calculating Income from Self-Owned Businesses; Preparing for Annual Audit
In this month’s feature, we discussed how to calculate and verify the income a household member gets from a self-owned business. You need to know what to count as income from the business so you can accurately calculate the household’s rent. And you must verify the income even though the member doesn’t have a regular employer or government source to whom you can send a verification form. HUD has special rules on calculating income from a household member’s business and verifying that income.
In this issue’s compliance article, we discussed what documents you need to prepare for your site’s annual audit. Every delay in compiling the necessary information for your CPA adds to the risk that you’ll miss HUD’s submission deadline. And if you don’t submit your audited financial statements by the required deadline, you face stiff fines and other penalties—including getting barred from doing further business with HUD.
QUIZ
QUESTION #1
A household member owns an alterations business and rents space next to a dry cleaner’s store. She pays herself a salary out of the business’s gross revenues. You should count her salary as part of household income. True or false?
a. True.
b. False.
QUESTION #2
When the household member in Question #1 started her business, she bought $2,500 worth of equipment and supplies with her own money. Five years later, she withdraws $3,000 from the business and puts it in her personal savings account. When determining the household’s income, you should count the $3,000 withdrawal as part of household income. True or false?
a. True.
b. False.
QUESTION #3
If the household member’s business is losing money, you must not use those business losses to offset other household income. True or false?
a. True.
b. False.
QUESTION #4
To verify business income, HUD prefers you use the business’s audited financial statements. True or false?
a. True.
b. False.
QUESTION #5
All sites that receive federal financial assistance must submit audited financial statements to HUD annually. True or false?
a. True.
b. False.
QUESTION #6
When preparing for an annual audit, the only documents you should gather for your CPA are accounting and financial documents. True or false?
- True.
- False.
ANSWERS & EXPLANATIONS
QUESTION #1
Correct answer: a
True. Count the amount each adult household member gets as a salary from the business [HUD Handbook 4350.3, par. 5-6(H)(1)]. Don’t confuse salaries with the income the household gets from the business; that needs to be treated separately. A salary paid to a household member is an expense for the business but part of the household’s income.
QUESTION #2
Correct answer: b
False. You would count only $500 of the $3,000 withdrawal as income. That’s because, although you count as income the amount of any cash or the value of any other assets that any household member withdraws from the business, you don’t count as income cash or assets a household member withdraws as reimbursement for cash or assets previously invested in the business. In this example, the household member previously invested $2,500, so you should subtract that amount from the amount she recently withdrew.
QUESTION #3
Correct answer: a
True. If the household member’s business is losing money, HUD says not to use those business losses to offset other household income [HUD Handbook 4350.3, par. 5-6(H)(3)]. Simply consider the household to have no income from the business. List the business as an income source on the recertification paperwork, but enter “0” as the income amount.
QUESTION #4
Correct answer: b
False. HUD prefers you to use the household member’s federal tax return, including supporting schedules, to verify business income. But if you can’t get copies of the Form 1040 and schedules and the business has audited financial statements, you may use them. And if the business’s statements aren’t audited, or if the accountant hasn’t finished the audit, you can use unaudited statements instead.
QUESTION #5
Correct answer: b
False. In February 2014, the Real Estate Assessment Center updated its Financial Assessment Sub-System to allow profit-motivated and limited distribution owners receiving less than $500,000 in federal financial assistance to submit owner-certified financial statements instead of audited financial statements. This change was made in accordance with Housing Notice H2013-23.
QUESTION #6
Correct answer: b
False. You should also make sure your CPA has access to your regulatory documents, tax documents, resident files, and other occupancy and site-related documents.