Hi, would love some guidance on issues specific to business owners and EFC. I have heard the various NPCs may not be accurate when a business is involved.
We are partners in an Llc filing as an SCorp. We are w2 owner- employees, with the bulk of our income coming from w2 salary, and the rest from business profit reported on schedule K-1. Business expenses include things like rent, utilities, paying subcontractors, health insurance, and employer contribution to sep-IRA. It is a consulting/services business so no real equity except equipment. We don’t do any crafty stuff to hide income.
Child is a rising sophomore, so we are just trying to get a handle on what to expect, whether our savings is on track, whether there are best practices for business owners in order not to undermine otherwise-appropriate FA eligibility (for example, if there are business equivalents to an individual not doing a huge Roth conversion in a base year, we’d like to be aware). Most of the info I’ve found online is pretty vague, but I may have overlooked something.
It is possible our child may be interested in selective colleges offering generous need based aid. As things stand, we could afford those if the NPCs are accurate. At sticker price, we could not.
A few questions:
-what business expenses might be recategorized as income by FA offices?
-are there standard practices for dealing with business income or is every FA office different?
-css business supplement seems to cover two years…are both considered in FA calculations, or just the one corresponding to base year? How do the amounts reported on the supplement affect EFC?
-the business makes an employer SEP contribution for all employees; we do not have a choice as there are other partners. Will this be viewed as income even though an employer contribution?
-is there any reason for us to minimize savings in the business by increasing distribution amounts? We are taxed on profits either way but along with the other partners have erred on side of keeping healthy emergency/operating fund on the business side. If better for FA purposes to distribute those funds, we would need to start that conversation among partners now.
Any insight is appreciated. Thanks!
Where is your business? If it’s located in your home, utilities could easily be added back in. Ditto cell phones, cars. These are things everyone pays for themselves anyway.
Any contributions to your tax deferred retirement accounts will be added back in as income. That happens to everyone…not just business owners. So if you contribute $20,000 each to your retirement…your actual incime will be $40,000 higher.
You will see some variation in how different colleges deal with the self employed.
If there is a huge difference between your gross income and your net income…you will likely have to explain why that is the case.
@thumper1 thanks!
We have an office in town so I assume those expenses will not be added back in. Let me know if I’m mistaken.
The SEP is a tough one as it is an employer plan; that is, it’s akin to the employer match in a 401k or an employer pension contribution. It’s not really up to us whether or not, or how much, to contribute. You are saying it will still be added back in just like a regular IRA or employee 401k contribution?
In terms of difference between gross and net, I assume you mean gross business income and what we end up with. There is definitely a gap, but we can show the relevant expenses on our 1120s. No family vacations disguised as business trips or anything like that 
@BelknapPoint what do you think about this business scenerio?
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It is a consulting/services business so no real equity except equipment. We don't do any crafty stuff to hide income.
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Does the business have a value? For instance, if you were to sell your portion of the business to the other owners. FA offices put a value on businesses as an asset.
I don’t know if this is true, but someone posted that as a business owner the school added back in the employer portion of FICA.
Do you deduct any meals with clients or car leases or gasoline or cell phones?
Health insurance costs…others can chime in here, but that might be something that would get added back in.
Each school will handle things differently, so just be prepared. Expect that the NPCs will not be accurate and make sure that your child has 2-3 financial safeties…schools that you know FOR SURE that you can afford because of assured merit or paying all costs.
Sorry, I don’t know enough about how business deductions are handled other than to echo what others have said: different schools that require the business supplement will require different information and do the calculations using their own formula.
@mom2collegekids thank you for the comments and I agree with your conclusion. Some of the items you list would really surprise us if added back in, so good to be forewarned. Practically speaking, our share of the business has no value but I don’t know how we would prove that. And, of course, that could change in the next few years.
@BelknapPoint thanks.
Seems the consensus is that there’s no set of general rules, or much transparency, across schools (aside from obvious cases of using the business to pay household expenses that most people pay from after tax income).
Any thoughts on whether both years of the business supplement are part of these calculations, or just the year corresponding to an individual’s base year?
The “regular” Profile form asks about income over a three year span: the base year, the year prior to the base year, and an estimate for the year after the base year. My understanding is that information about the year before and the year after the base year are used to provide additional context to the family’s overall financial picture, but only the figures from the base year are used in the actual calculation of need-based aid. If there were drastic differences between years, that might raise red flags and prompt the FA office to reach out for additional information.
My guess is that the information asked for on the business supplement for the non-base year is used in the same manner. But that’s just a guess.
To the OP…there was a poster on this forum a while ago. They had a gross income that was well over $300,000 as I recall…but their net income was less than $50,000. They were selected for verification by the college. As I recall, this was Boston College. The student ended up not attending there. Aid was not what the parents expected.
@thumper1 hmm… I wonder if some of this has to do with how the business is structured? C Corp might allow for more hiding of assets. For us, the S Corp is really just a pass through entity so we have no way of hiding income there. That is to say, all business income passes through to our personal return via the K-1. But it does sound like we should expect the unexpected in terms of FA process.