As managers of affordable housing, we are often faced with applicants and residents who refer to themselves as “self-employed,” but are unable to adequately document their income. Such individuals are not generally considered self-employed since persons who are self-employed are required to keep meticulous financial records. People who are truly self-employed are among the easiest to verify in terms of income.
Many of the applicants to affordable housing who claim to be self-employed are actually either working in cycles or have what is deemed a “hobby.” In the case of cyclical or seasonal workers, HUD recommends using history as the best way to determine likely income. Prior tax returns or some past financial records may often be used to establish a likely future income. A more difficult challenge comes when trying to determine if we are faced with a self-employed person or someone who just has a “hobby.”
The IRS defines a “hobby” as an activity not engaged in for profit. Certain questions to be answered to make this determination include:
- Does the time and effort put into the activity indicate an intention to make a profit?
- Does the person depend on income from the activity?
- Has the person altered methods of operation in order to improve profitability?
- Does the person have the knowledge needed to carry on the activity as a successful business?
- Has the person made a profit from similar activities in the past?
- Does the activity make a profit in some years?
If it is clear that the purpose of the activity is profit vs. pleasure, it is a business and the person should be treated as self-employed. If there is no profit and no obvious intention to make a profit, and the activity produces income at random, irregular times, it is a hobby and the income should not be counted. However, even if it is a hobby, if it produces income on a regular, recurring basis, the income should be counted for housing purposes.
Finally, remember that it is the applicant/resident’s responsibility to document their income. As owners and managers, our responsibility is to seek the documentation. If someone seeking housing that is supported by taxpayers cannot document their income to the extent required to show eligibility and properly calculate rent payments, they are not entitled to assistance.