How to Verify Income of Newly Self-Employed Ride-Hailing Service Drivers
Explosive growth in ride-hailing services such as Uber and Lyft are attracting more and more drivers. These drivers earn extra income with the benefit of working flexible hours. According to recent research by JPMorgan Chase Institute, from late 2013 to this spring, the number of households earning income from transportation-related apps has grown 20 times. And a separate study Uber released in late 2016 showed that while the number of drivers on the app had grown, average hourly earnings remained fairly stable at about $20 an hour from mid-2014 to the end of 2015.
With such growth, you’re probably seeing an increased number of LIHTC households and applicants who earn income from ride-hailing apps. The flexible nature of the work may cause challenges for managers to verify, calculate, and document income information. The drivers are self-employed and their income can be sporadic and dependent on the rates prescribed by the app. We’ll discuss considerations in calculating net income from a tenant or applicant’s rideshare business and give you a Model Form: Use Affidavit to Verify Self-Employment Income from Ride-Hailing Business, that you can use when drivers don’t have prior year tax returns.
Verifying Self-Employment Income
In some cases, you may use gross income to project annual income. However, in most cases, residents want you to treat this income as self-employment income. When a resident or applicant is self-employed, he or she is responsible for keeping the records of the business operation. According to the IRS Form 8823 Guide, this means residents and applicants must provide information that allows you to verify “net income from a business.”
The HUD Handbook offers guidance about the types of information to request when verifying the net income from a business [HUD Handbook 4350.3, App. 6-C (H)]. You can use the following data to estimate income for the next 12 months:
- IRS Tax Return, Form 1040, including any Schedule C (Small Business);
- An accountant’s calculation of depreciation expense, computed using straight-line depreciation rules. This is required when accelerated depreciation was used on the tax return or financial statement;
- Audited or unaudited financial statement(s) of the business;
- Loan application listing income derived from the business during the previous 12 months; and
- Applicant’s notarized statement or affidavit as to net income realized from the business during the previous years.
In addition, you may request a summary of payments to the resident or applicant from the ride-hailing company. Ride-hailing companies provide income statements showing monthly, quarterly, and annual earnings that are reported to the IRS.
In the ride-hailing business, acceptable expenses to be included when arriving at net income include amenities for passengers such as water or gum, tolls, parking fees, maintenance, gas, and vehicle loan interest. Only the expense portion that’s related to the business use of the vehicle can be deducted. The resident or applicant should have receipts, logs, and other documentations to support the vehicle expenses, especially when the vehicle is also being use for personal transportation. The resident or applicant is also allowed to deduct depreciation on the vehicle.
Increasingly, you’ll encounter situations in which the applicant or resident is just starting a ride-hailing business. In these cases, it’s more challenging to project income. Where the person is unable to provide a financial statement of the business or the prior year tax return, you can use a notarized statement or affidavit showing the net income for a business. You can use our Model Form: Use Affidavit to Verify Self-Employment Income from Ride-Hailing Business for this purpose.
The 8823 Guide says that owners are allowed to “use the current year business activity based on the number of full months in business” to calculate the tenant’s income. This method is used when the applicant or resident cannot produce a tax return, the applicant or resident started the business in the certification year, or the current year income from the business will be inconsistent with the prior year’s income from the business. As such, it’s important to get as much information as you can to make a reasonable projection of income.
Also, be sure to ask for receipts or other documents such as a mileage log to verify expenses shown on the financial statement or other verification form. Copy the receipts and include them in the household’s file. Residents should keep these receipts because they’ll need them for tax purposes.
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|Use Affidavit to Verify Self-Employment Income from Ride Hailing Business|