When an individual:

Current Year's Estimate Based on Prior Year's Profit

• has been conducting the same trade or business for several years;

• has had NESE which has been fairly constant from year-to- year; and

• anticipates no change or gives no satisfactory explanation of why current NESE would be substantially lower than past NESE

Use the NESE from the prior year as an estimate for the current taxable year.

When an individual:

Gross-Net Ratio

• is engaged in the same business that he or she had only in the preceding taxable year; and

• Calculate from the individual's tax return or business records the ratio between net profit and gross receipts for the last year.

EXAMPLE: Net profit of $1,200 for $6,000 gross income or 20 percent.

• anticipates no change or gives no satisfactory explanation of why current NESE would be substantially different from what it has been in the past

• Calculate from his or her records the actual gross receipts for the current taxable year and project it for the remainder of the year.

EXAMPLE: $4,000 in current year's receipts for the first 6 months gives an assumed gross of $8,000 for the entire year.

• Apply the previously calculated gross- net ratio to the current year's assumed gross to arrive at the estimated NESE.

EXAMPLE: 20 percent of $8,000 is $1,600.

EXCEPTION: Do not use this method for businesses which are seasonal or have unusual income peaks at certain times of the year; go to next applicable procedure.

When an individual is engaged in a new business

Projecting Partial Year's Profit for Whole Year

• Obtain the individual's profit and loss statement or other business records for his or her taxable year to date.

• Ascertain his or her net profit to date.

• Project that net profit for the entire taxable year.

EXCEPTION: Do not use this method for businesses which are seasonal, or have unusual income peaks at certain times of the year; go to next applicable procedure.

When:

Individual's Estimate

• an individual is engaged in a new business and records are not yet available; or

• the business has been going on for some time but no records were kept

Use an allegation signed or recorded on a DROC of the individual's best estimate.

When an individual:

Current Year's Estimate Varies from Past Records

• alleges his or her NESE for the current year will vary from NESE for past years; and

• Obtain a statement signed or recorded on a DROC from the individual explaining the basis for the variation.

• gives a satisfactory explanation for the variation

• If the individual's estimate of NESE for the current year is higher than that of the prior years, and the individual satisfactorily explains why, accept the individual's estimate of NESE.

EXAMPLE: Individual recently added new products to his mail order sales catalog and sales have picked up dramatically.

• If the individual's estimate of NESE for the current year is lower than that of prior years, and the individual satisfactorily explains why, request any relevant documentation for the file and accept the lower estimate.

EXAMPLES:

• Satisfactory Explanation — the business has suffered a heavy loss or damage due to fire, flood, burglary, serious illness or disability of the owner, or other catastrophic event.

• Relevant Documentation — copies of newspaper accounts of the event, police reports, etc.

  NOTE: In some cases (e.g., downturns in the economy) there may not be any documentation of the event. In such cases, the individual's statement signed or recorded on a DROC explaining the basis for the variation is sufficient documentation.