How the IRS Measures Self-Employed Income in a Hardship Case

Self-employed people have the hardest time with IRS financial statements, and it is not because they are hiding anything. It is because their income moves. A contractor has a great spring and a dead winter. A hairstylist loses a chair. A rideshare driver's car breaks down. The IRS wants one monthly number, and getting that number right is half the battle in a hardship case.

Which form you use

If you operate as a sole proprietor filing Schedule C, you complete Form 433-A, including Sections 6 and 7. Form 433-A (Rev. 6-2026) asks on line 52 whether the business is a sole proprietorship. If the answer is no, the form says to complete Form 433-B, because "All other business entities, including limited liability companies, partnerships or corporations, must complete Form 433-B."

The Financial Analysis Handbook adds a wrinkle in IRM 5.15.1.2. For partnerships and single member LLCs where the individual owner is the liable taxpayer, the IRS analyzes both the business income and expenses on Form 433-B and the owner's individual income and allowable living expenses on Form 433-A. In some cases Form 433-A is also used to figure reasonable compensation for an owner.

If your case is in ACS, Form 433-F handles self-employment more simply. Section E covers receivables and merchant accounts, and Section G asks for net self-employment income with a current year profit and loss statement attached.

Section 7: the monthly business picture

Section 7 of Form 433-A lists monthly business income on lines 68 through 77: gross receipts, gross rental income, interest, dividends, cash receipts not included elsewhere, and other income. Business expenses go on lines 78 through 88: materials, inventory, wages, rent, supplies, utilities and telephone, vehicle gasoline and oil, repairs and maintenance, insurance, current taxes, and other expenses including installment payments. Line 89 totals expenses. Line 90 is net business income, and it carries to line 24 in Section 5.

The form tells you to "Use the prior 3, 6, 9 or 12 month period to determine your typical business income and expenses." Choose the period that honestly reflects the business. If you are seasonal, a 12 month period is usually the fairest. If the business has collapsed recently, a short period showing the collapse may be accurate, but expect the IRS to ask why the past year looked different. Form 433-A footnote instructions say that if net business income "is more or less than previous years, attach an explanation." Do it.

Only cash expenses count

This is the biggest adjustment. IRM 5.15.1.18 says deductions "may not necessarily be allowed as an expense in determining the ability to pay -- only actual cash expenses are used." Its example is direct: a $10,000 depreciation deduction "would not be allowed as an expense when determining ability to pay because depreciation is a non-cash expense."

IRM 5.15.1.12 applies the same rule when the IRS starts from your Schedule C. Net profit may be used "if all duplicate deductions are eliminated," and "Deductions for depletion and depreciation on Schedule C are not cash expenses and these amounts must be added back." Interest cannot be deducted if it is already counted in an installment payment that is being allowed elsewhere.

So a Schedule C showing $30,000 of profit after $12,000 of depreciation becomes $42,000 for collection purposes. That surprises people, and it can wipe out an apparent hardship.

No double dipping with your home

If you deduct business use of your home on Schedule C, that cost is already inside the housing and utilities standard on the personal side. IRM 5.15.1.12 lists "expenses for business use of home already included in Allowable Living Expense for Housing and Utilities" as a duplicate deduction to eliminate. The same logic applies to vehicles. IRM 5.15.1.4 says a vehicle lease claimed as a business expense "will not be allowed as part of the transportation expense on Form 433-A," and a vehicle used for both business and personal purposes should not have its expense duplicated.

Losses are zero

If the business loses money, Form 433-A says to enter "0" on line 24. IRM 5.15.1.12 is the same: "If the net business income is a loss, enter zero. Do not enter a negative number." A loss does not reduce your wage income or your spouse's income. It just means the business adds nothing.

That has a practical consequence. If the business is losing money every month, the IRS may ask whether it should continue at all, and whether the time could be spent earning wages. A hardship request is stronger when it explains why the business is still the best path to income.

Verification looks different for business owners

Business income gets more scrutiny than wages because the IRS cannot simply check a W-2. IRM 5.15.1.4 lists the kinds of questions a revenue officer should ask business taxpayers: how the business generates income, its main products or services and customers, whether it has recurring customers under contract, the assets needed to produce income, foreign income or assets, how it gets paid "and whether they accept virtual currency," and its internet presence.

The handbook tells revenue officers to compare Forms 433-A and 433-B to income tax returns and to analyze bank deposits. When expenses exceed income, IRM 5.15.1.4 tells them to look for undisclosed accounts, deposits, fluctuating income across prior returns, commingling of funds, and whether "expenses are being paid from bank statements provided." If your bank deposits are twice your reported gross receipts, you need an explanation, such as transfers between accounts or loan proceeds, with proof.

For business taxpayers in the field, IRM 5.15.1.4 notes that, absent a safety concern, an appointment to visit the business "must be made to observe and document the physical layout of the business, number of employees, and the type and condition of the business assets."

Business assets and income-producing equipment

Section 6 asks for business bank accounts, receivables, payment processors, merchant accounts, and business assets on lines 64 through 67c. Equity in business equipment is part of the analysis, but the IRM recognizes that taking away the tool can kill the income.

IRM 5.15.1.23 says that when an asset is necessary for the production of income, the IRS should compare the value of the income stream with the equity available. Its own example involves a self-employed construction tradesman and his truck. If he sells the truck, the IRS allows the expected cost of delivery services. If he borrows against it, the IRS allows the loan payment. And if a loan cannot be secured and losing the truck "would create an economic hardship," circumstances "warrant allowing the taxpayer to retain the asset without requiring him to borrow."

That example is worth showing a revenue officer when your work truck, your salon chairs, or your lawn equipment are on the table.

The personal side still uses the standards

Once net business income is set, it flows into Section 5 alongside any wages, Social Security or other income. Your personal living expenses are measured against the Collection Financial Standards like anyone else's. IRM 5.15.1.2 says the standards "are not applicable to corporations, partnerships, Limited Liability Companies (LLC), or for any business expenses," but they apply to you personally.

Current taxes are allowed

Self-employed people owe estimated taxes, and the IRS wants those paid going forward. IRM 5.15.1.11 lists current year taxes as an allowable expense: "Current taxes are allowed regardless of whether the taxpayer made them in the past or not." Put your estimated tax payment on line 46 of Form 433-A. Then make the payments. A hardship request from a self-employed person who is not making estimated payments is a request to be denied, because the IRS will see a new balance building.

Sole proprietors qualify for hardship codes

IRM 5.16.1.2.9 says hardship closing codes can be used for sole proprietorships, partnerships where a general partner is personally liable, and LLCs where an individual owner is the liable taxpayer. For those business accounts, the systemic reactivation check is based on "the annual income of the individual, general partner or member." Your personal tax return, not the business's, is what the IRS watches.

Practical steps

• Prepare a 12 month profit and loss statement that ties to your bank deposits.
• Add back depreciation and remove home office and vehicle duplications before the IRS does it for you.
• Separate business and personal accounts if they are mixed. Commingling invites suspicion.
• Get current on estimated payments, even small ones, before you ask for hardship.
• List every business asset, with a realistic value and a note explaining whether it is needed to produce income.

The IRS will rebuild your income its own way whether you help or not. Do the rebuild first, so the number it lands on is one you already understand.