Can you explain the Social Security work incentive Property Essential to Self-Support (PESS)?

PESS is a work incentive for people receiving Supplemental Security Income (SSI). The Social Security Administration (SSA) does not count some resources that are essential to your means of self-support. PESS allows for the unlimited accumulation of certain resources that a person uses for their trade or business. PESS allows a person to build unlimited funds in a small business operating account. There is no similar exclusion in regular wage employment for liquid funds.

Those resources can include:

1. All liquid resources used in the operation of a trade or business are excluded as property essential to self-support. Liquid resources are not considered property essential to self-support except when used as part of a trade or business.

2. Property that you use in a trade or business (e.g., inventory, equipment, land, vehicles, commercial buildings)

3. The value of items used for work as an employee (e.g., tools or equipment).

4. SSA does not count up to $6,000 of equity value of non-business property, which you use to produce goods or services essential to daily activities (e.g., land used to produce vegetables or livestock solely for consumption by your household).

5. SSA does not count up to $6,000 of equity value of non-business income producing property if the property yields an annual rate of return of at least 6 percent (e.g., rental property). However, SSA does not consider liquid resources as property essential to self-support unless you use them as part of a trade or business.

Trade or Business

Property Essential to Self-Support (PESS) only applies to unincorporated for-profit businesses that produce "net earnings from self-employment" in the "trade or business" exclusion, such as sole proprietorships, partnerships, and Limited Liability Companies (LLC's). The business needs to be making money or attempting to make money and the owner must be actively earning the money (not be a passive activity like investing). A corporation is by definition a separate legal entity and SSA counts the owner's share of a corporation as a resource, which cannot be excluded for PESS.

One possible solution to the problem of owning an incorporated self-employment business may be to set up a Limited Liability Company (LLC) instead that files taxes as a sole proprietorship or partnership LLC. This prevents the resources of the LLC from being counted as personal resources, while taking advantage of the Liability Protection that a LLC offers, with an unincorporated tax filing status, and allows the owner to maintain SSI eligibility by keeping personal resources under the normal $2000 resource limits.

Current Use Principle

Property used in a trade or business, including property used by an individual as an employee, must be in current use in the type of activity that qualifies it as essential to be excluded as essential to self-support. Current use is evaluated on a monthly basis. Property not in current use can be excluded as essential to self-support only if:

• it has been in use; and
• there is a reasonable expectation that the use will resume.

Time Limit for Resumption of Use

• 12-Month Rule: Resumption of use must be expected within 12 months of last use. For example, if property was last used in October, resumption of use must reasonably be expected to occur before the end of the following October.

• 12-Month Extension: The 12-month period can be extended for an additional 12 months if nonuse is due to a disabling condition.

• No Intent To Resume Activity: If the individual does not intend to resume the self-support activity, the property is a countable resource for the month after the month of last use.

Setting Up a PESS and Tracking

An individual does not have to have a written plan and a PESS is not a separate account, like a PASS (see the November 2004 EQUITY article for more information). The person must use a separate business checking account and not co-mingle business funds and expenses with personal funds and expenses. To validate current use, SSA field office staff are required to obtain an individual's signed claim that liquid resources are used in the trade or business. There is no other justification or explanation required other than the business owner's signed statement that the business resources are in current use.

Standard business records for a business account include Profit and Loss records, Cash Flow records and Balance Sheet & Asset records. PESS will show up on Cash Flow and Balance Sheet Records/Reports for the business and on IRS Business Assets reporting forms for taxes. Quick Books (or software like QuickBooks) generally is the best way to sort out Owner's equity in a business.

For example, if an individual receives a personal or business loan, it is never considered income (whether in a business account or not). However, if over the $2,000 ($3,000 for a couple) asset resource limit of SSI, the business loan funds need to be set aside in the business account in order to avoid having to spend all the funds within one month of receiving the loan. A person cannot have the loan funds in their personal account, but must be a separate business account.

For more information on PESS:

Social Security Considerations for Small Business Owners with Disabilities is a free booklet produced by Griffin-Hammis Associates, LLC that is intended to introduce basic self-employment and Social Security considerations while developing a small business with someone with a disability receiving SSI and/or SSDI. It can serve as a general guide for individuals with disabilities, family members, and others, in understanding how disability benefits interact with self-employment planning and ongoing self-employment development and expansion.

Thanks to Cary Griffin and David Hammis of Griffin-Hammis Associates, LLC for the valuable information.

You can read or download the booklet in PDF format (requires Adobe Acrobat Reader) from:
http://www.griffinhammis.com/publications/SSAConsiderations.pdf

Also, Brookes Publishing produced and sells Cary and David's book “Making Self Employment Work” which is available at Brooks Publishing and most books stores online with links to their book at:
http://www.griffinhammis.com/welcome.asp

For more information, see the SSA rules and regulations (POMS) SI 01130.500 through SI 01130.504 (specifically SI 01130.501 & SI 01130.504

Property Essential to Self Support Overview:
https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0501130500

Essential Property Excluded Regardless of Value or Rate of Return:
https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0501130501

Essential Property Excluded up to $6,000 Equity Regardless of Rate of Return
https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0501130502

Essential Property Excluded up to $6,000 Equity if it Produces a 6% Rate of Return
https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0501130503

Essential Property - Current Use Criterion
https://s044a90.ssa.gov/apps10/poms.nsf/lnx/0501130504