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: |
275,000 |
625,000 |
325,000 |
375,000 |
|
K-1 Business Income |
(140,000) |
(140,000) |
(140,000) |
(140,000) |
|
Subtotal: |
135,000 |
485,000 |
185,000 |
268,333 |
|
Add: Distributions from Business To |
65,000 |
65,000 |
65,000 |
65,000 |
|
Less: Portion used for Taxes |
(55,000) |
(55,000) |
(55,000) |
(55,000) |
|
Subtotal: |
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.