The $250,000 Threshold for Adjusted Gross Income (AGI)
Among the many 8(a) business development program eligibility requirements, the applicant for 8(a) Certification must have an average AGI over the past three taxes years of less than $250,000.
What is the definition of Adjusted Gross Income?
Adjusted gross income (AGI) is a tax term for an amount used in the calculation of an individual’s income tax liability. AGI is calculated by taking the applicants gross income and subtracting their maximum allowable adjustments. AGI is the last number on the first page of the Form 1040.
How do I determine my Adjusted Gross Income for 8(a) Certification Purposes?
The easiest way to initially determine if you exceed the $250,000 threshold, averaged over the last three years is to add up the AGI number reported on the first page of your last three years of federal tax returns. If you add these three numbers, divide them by three and result in a number larger than $250,000 you must do further analysis. If the number is less than $250,000 you do not exceed the threshold regardless of what is discussed below.
If your resulting calculation shows more than $250,000, and you are a married, filing the taxes jointly, you should then separate the portion of any income reported on the tax return between the applicant and their spouse (e.g Line 7 (1040). Wages, salaries, tips, etc = $100,000 (Applicant’s portion, $40,000 - Spouse’s portion, $60,000). Once you have separated out all of the income reported on the tax return between the applicant and their spouse again take the total for the last three years and divide them by three. If the resulting number is still larger than $2500,000 you must do further analysis. If the number is less than $250,000 you do not exceed the threshold regardless of what is discussed below.
One final analysis can be performed to see if you still exceed the $250,000 threshold. If the applicant business concern is an LLC or S-Corporation you may:
1. Deduct any income associated with the business concern that was reinvested into the business concern, less any distributions.
2. Deduct any income used to pay the LLC or S-Corporation Federal taxes within 12 months of the distribution of income.
Determining your AGI can be somewhat complex for 8(a) Certification purposes. Cloveer can help you to determine your AGI should you need further assistance. Please visit our website at www.cloveer.com for more information on 8(a), HUBZone and 8(m) Certification.