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SBA 8a Net Income Calculation

The net income calculation that is done for the 8a certification can be slightly complicated at first. Although the majority of people in the United States do not make more than $250,000 per year the calculation can be relevant for some business owners seeking 8a. In the example below the husband owns 51% of an S-corporation and the wife own’s 49%. Below is an example of how the net income would be calculated by the SBA.

 

Note: K-1, or other type of distribution from the business does not occur in a C-corporation scenario.

 

Tax Year

2009

2010

2011

Average

Adjusted Gross Income line 37 of 1040 federal tax return

350,000

700,000

400,000

450,000

Less:  Wife’s W2

(75,000)

(75,000)

(75,000)

(75,000)

Subtotal:  
Husband’s Income

275,000

625,000

325,000

375,000

K-1 Business Income

(140,000)

(140,000)

(140,000)

(140,000)

Subtotal:  
Husband’s Income 

135,000

485,000

185,000

268,333

Add:  Distributions from Business To
Owner

65,000

65,000

65,000

65,000

Less:  Portion used for Taxes

(55,000)

(55,000)

(55,000)

(55,000)

Subtotal:  
Husbands Income

145,000

495,000

195,000

278,333

One Time Event

0

(100,000)*

0

(33,333)

Total:  Husbands Income

145,000 395,000 195,000

245,000

 

 

*A onetime event such as an inheritance can be excluded from the net income calculation. In the case the removal of the inheritance lowers the applicant’s income from $278,333 to $245,000 and is therefore under the threshold.
We can see from the above example even though the couples AGI on line 37 for the couple was $450,000 for the past three years, however the net result for the applicant in this case was $245,000 which is under the $250,000 threshold.