|DATE:||May 29, 1997|
|SUBJECT:||Verifying a Child and Adult Care Food Program (CACFP) Provider’s Household Income Through Use of the Internal Revenue Service (IRS) Form 1040|
Special Nutrition Programs
In response to recent inquiries, we are issuing the following guidance on using IRS Form 1040 to verify a provider’s household income when s/he attempts to qualify for tier I status on the basis of household income. The phrase “provider’s household income,” as it is used in this memorandum and the attachment, means the income of the family day care provider and the income of all other members of the household.
Although these inquiries have generally posed the question, “Which line on Form 1040 can we use to verify a provider’s household income?,” there is, in fact, no single line on Form 1040 which adequately captures “household income” as it is defined in CACFP. Nevertheless, because of the difficulties inherent in verifying the income of self-employed persons, Form 1040 will often be the best source of information for verifying household income, provided that the sponsor applies the guidance set forth in this memorandum and the attachment regarding the use of Form 1040 for verification purposes.
Because CACFP providers are self-employed, verification of their income eligibility for tier I status will raise issues different from those which usually arise in verifying household applications for free or reduced price benefits in the National School Lunch Program (NSLP). In most places, self-employment is the exception among households sampled for NSLP verification. Because it is usually possible to verify current household income in NSLP solely through the use of wage statements issued by employers, tax statements are generally viewed as a “last resort” for NSLP verification. In CACFP, however, all providers’ households will include at least one self-employed individual and, in some cases (such as providers whose spouses are farmers), both spouses will be self-employed. Given these circumstances, guidance on the use of the prior year’s IRS Form 1040 for verification is necessary, since it will be fairly common for sponsors to have no other readily available and reliable way to verify a provider’s earnings from their child care operations. This memorandum will outline some of the differences between the way that household income is defined for CACFP and IRS purposes, while the attachment will discuss when it is and is not appropriate to use Form 1040 as the sole source of verification in CACFP.
The major differences between the CACFP and IRS definitions of income involve: the treatment of business losses; the treatment of distributions from pensions or other retirement plans; the exclusion or inclusion of certain types of income; and the use of deductions. In order to simplify the eligibility and verification process for determining officials as well as to more accurately account for the resources currently available to a household attempting to qualify fora means-tested program, Congress amended the National School Lunch Act in 1980 and 1981 in order to eliminate previously allowable adjustments to income which IRS permits for tax purposes.
For example, when determining “income” for tax purposes, the IRS allows losses from business or investment to be deducted. However, the deduction of business or investment losses is not permitted in determining eligibility for benefits in any of the child nutrition programs, including CACFP. Both the school programs and CACFP Eligibility Guidance prohibit deduction of losses and require instead that, in this case, the loss be treated as “zero income.” Thus, if a wage earner reports $30,000 in income while his/her self-employed spouse reports a business loss of $5,000 on line 12 of Form 1040, IRS would view “household income” as $25,000, whereas the USDA child nutrition programs would consider the household’s income to be $30,000.
Similarly, IRS may allow annual distributions from Individual Retirement Accounts (IRAs), pensions, and other retirement plans to be “adjusted” (i.e., only partially counted for the purpose of determining taxable income, depending on various circumstances such as the source of the payment, the employee’s age or share of the contributions, etc., which are irrelevant to the determination of income in the child nutrition programs. Specifically, lines 15, 16 and 20 on Form 1040 allow, under certain circumstances, a portion of annual distributions from pensions or retirement funds to be excluded from taxation. For the purpose of establishing income eligibility for CACFP and other child nutrition programs, all of the retiree’s annual income from such sources must be counted as part of household income.
Finally, IRS allows a number of forms of income to be excluded for tax purposes which the child nutrition programs require to be included. Specifically, on line 21 of Form 1040, taxpayers are permitted to exclude child support, welfare benefits, and other forms of income which are countable for purposes of establishing eligibility for benefits in the child nutrition programs. Family day care home sponsoring organizations must use the CACFP’s Eligibility Guidance for Family Day Care Homes, Part II, Determining Individual Household Income Eligibility, in order to determine the rules for including or excluding these and other forms of income from the calculation of a household’s total income and the determination of its eligibility.
ROBERT M. EADIE
Child Nutrition Division