Hi,
I am a self-employed psychologist with a private practice in a rented office. I have business expenses that I deduct on my income tax to arrive at my adjusted gross income. My daughter receives a financial aid package which calculates our contribution based on income. I have just recently learned that sometimes business expenses are added back in as income by financial aid offices and was quite taken aback as mine are not optional expenses. What are the sort of expenses that might get added back in? I pay rent, malpractice, conference fees, license fees, and assorted expenses like paper towel, cell phone for patient contact, my health insurance, office magazines, paper-- and this year needed a new laptop on which I do all of my paperwork and billing, and a new desk as my old one was literally falling apart. These expenses obviously are necessary to run my business. Are these the sort of expenses that might be acceptable deductions and not added back in? Thank you
This will depend from school to school. Yes, the expenses you have listed are ones needed for your business. The ones likely to be added back in are ones people have ANYWAY…like a cell phone, and computer. Things like office magazines would be another likely add in…as you could just as easily subscribe to these yourself.
Think of things that people have anyway…those are the things most likely to be added back in. For example…home offices are a common add in…they are part of your house anyway…you pay the utilities anyway…etc. but you don’t have that issue.
Others that will likely get added back in: food, any entertaining, travel, gas allowance, car expenses.
Only thing that jumped out at me was the cell phone, and maybe the computer. I’m an attorney and have similar expenses, and my son’s school doesn’t seem to add much back in. I think things like car expenses are often added back.
They take away any retirement contributions as well.
Depreciation may get added back.
Re: retirement contributions. They don’t “take away” your retirement contributions. If you are completing a 2017-2018 fafsa, any contributions you MADE in 2015 to tax deferred retirement plans will be added back as income.
But this happens with EVERYONE…not just the self employed or business owner.
@thumper1 - They are “taking away” a legitimate deduction, and yes, they do it to everyone. The OP may not be aware of that.
@Zinhead you earned that tax exempt retirement money…and chose to put it into retirement. For TAX purposes, this doesn’t count as “income” but for financial aid purposes, it does.
@thumper1 - Yes, they are taking away a deduction. Thanks for clarifying that.
Yes, many legitimate tax deductions are not allowed in the calculation of FAFSA EFC. See Form 1040 Schedule A (mortgage interest, property taxes, charitable contributions, etc.).
Is your AGI sufficiently low that your kiddo would qualify for need based aid? Do the colleges meet full need for all accepted students?
To clarify on the retirement contribution issue: Does the type of retirement contribution matter when the FA office is deciding what to add back in? For example, does a SEP IRA employer contribution get treated in the same way as a 401 k employee contribution?
My guess is that all voluntary retirement contributions for which a tax deduction was taken or that were made with pre-tax dollars will be added back to income for FA purposes.
The schools vary, but most don’t look beyond the schedule C and some of the expenses like magazine subscription might be subsumed within a larger category and not be a focus of attention. The obvious spots for them to focus on are categories like travel and entertainment, and vehicle expenses, or a home-office deduction. Bigger ticket deductions that often get abused. As others have said, depreciation is likely to be added back in. Some schools may also look at the overall percentage of deductions compared to income- if your overhead is 80% of your gross receipts, the college is likely to scrutinize your expenses very carefully.
I never had much of a problem, but I had a modest income and did my best to keep overhead low. But the issue you raise is a common one for self-employed parents, and it doesn’t go away-- it can be especially frustrating if there is significant variation in income and expenses from one year to the next.