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WebCPA
WebCPA, Tax Accountant
Category: Tax
Satisfied Customers: 110
Experience:  Licensed CPA. 10+ years experience.
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For the self employed, what is the average percentage typically

Resolved Question:

For the self employed, what is the average percentage typically claimed for expense/deductions to their gross earnings? If I make 26,000 and deduct 5,000, which is about 19 percent, is that about average compared to others, or is it more or less?
Submitted: 2 years ago.
Category: Tax
Expert:  WebCPA replied 2 years ago.

Welcome and thank you for your question!

Based on what I have seen in practice, the expenses in your example are a bit low compared to average. It should be noted, however, that net income from self-employment can vary widely depending on many factors, such as industry and age of business. Start-up businesses, for example, typically lose money at first.

The IRS permits deductions against income for any expenses deemed "ordinary and necessary" to the business. A careful review of form schedule C might review some items to deduct that you may not have thought of already.

I found a link to some IRS statistical tables you may be interested in reviewing:

http://www.irs.gov/taxstats/indtaxstats/article/0,,id=134481,00.html

Kind regards,

WebCPA

Customer: replied 2 years ago.
Thanks, XXXXX XXXXX like according to those stats, the average is close to 30 -50 percent if Im not mistaken. I just took a course in statistics, and still dont understand those spreadsheets.

I am a small business sole proprietor and do computer training, my expenses are mostly software, health insurance, and research, books etc. I have little travel expenses or enterainment.

The reason I need to know is that I am applying for affordable housing and in order to estimate my income this year, the evaluators will take 6 weeks of earnings, multiply by 52, then I am assuming they will factor in a percentage for expense deductions and use the results to see if I qualify, but I dont know what percentage they will pick. I would like to have some stats to argue in my favor of course. If they use my past returns then I am in the 18 percent range, but if they go by those statistics and apply 30 -40 percent then I might make too little to qualify. What do you think is a reasonable percentage for a small business like mine?

Expert:  WebCPA replied 2 years ago.

Greetings,

When the evaluators take six weeks of "earnings" perhaps they will be taking net income and not gross income. You indicated that you "assume" they will factor in a percentage for expense deductions. It seems to me they would take your net income rather than try to back into your net income based on gross earnings. Every business is different and even within businesses in the same industry and the same size, there could be widely different results. Businesses are like snowflakes and fingerprints, all different and unique in their own way.

The best argument you could make in your favor would be to show them a copy of your prior year tax return, as filed. Sometimes a letter from your CPA to go along with it is a slam dunk. We have prepared numerous letters for self-employed clients stating that the client has been in business for X number of years in X industry and has consistently reported the revenues and expenses of the business on their tax returns.

The only other advice I could provide is to ask the agency you are applying with to provide specifics as to how they will calculate your net income. You should be able to access their statistics and argue the credibility of them at that time. If they do in fact use statistics to calculate your net income as you indicated, they will need a well documented creditable source, to which you can use also.

Thanks for the question!

Kind regards,

WebCPA

IRS Circular 230 Disclosure:

Any U.S. federal tax advice contained in this document is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code, or (ii) promoting, marketing, or recommending to another party any transaction or matter that is contained in this document.

WebCPA, Tax Accountant
Category: Tax
Satisfied Customers: 110
Experience: Licensed CPA. 10+ years experience.
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