FAFSA includes K-1 earnings as part of AGI, correct? I’m concerned because this isn’t an accurate representation of our take-home income. It makes our income look double what we actually make because it’s just being passed through to us from a family-owned business (LLC filing as an S-Corp). Is there any way to legitimately exclude the pass-through “income”? …income in quotes because it’s not actually income we get 
I’m not understanding. If it passes through to you and you get to keep and spend it, how is it not your income?
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“Pass-through” is a term, but not actually happening. The business itself had income, but we did not receive that income ourselves. We, as a family, have none of the K-1 earnings to spend. The business has the money to spend on business expenses.
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To clarify “pass-through” is an accounting term that our bookkeeper and CPA uses.
I’m not a FAFSA expert, but in my mind, you have to report your AGI on the FAFSA, period. Maybe they ask a question about K-1 income at some point - I have never had to fill out anything about a business. But yes, you do have to report your AGI as it is on your tax docs.
We have pass through income and it is definitely income we receive and pay taxes on and can spend. Unless there is a loss, which also gets passed through. Are you dealing with a pass through loss?
Paging @kelsmom and @BelknapPoint and @politeperson as this doesn’t match with my personal experience at all.
Editing to add…is the pass-through income given back to the business as a loan?
The situation you’re describing is pretty common with the S Corp structure. Pass through income doesn’t necessarily match distributions made to you.
But it’s still included in your AGI and reported on financial aid forms, yes.
Most schools offering good need-based aid will also do a deep dive on the business tax forms and some will want the CSS business profile.
You can discuss with financial aid offices individually if you think the forms don’t accurately reflect your financial situation.
But I think it’s hard to make the case that business income not distributed isn’t income. Your family could choose to distribute at any point if there are funds available in the business.
S corp has advantages but unfortunately FA isn’t one of them. If it helps, any pension/retirement contributions the company is making on your behalf (and treating as an expense on the 1120s) aren’t flowing through and aren’t added back by most FA offices.
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It’s not a loss. It stays in the business as retained earnings. The business has money to grow/run the business with. It’s not ever received by us or given back to the company.
We could, but then the business wouldn’t have money to pay employees bonuses in January for the prior year performance. I hate to think I have to choose not to pay bonuses to other hard-working folks in order to pay more for college. 
Income included in the AGI is considered income for FAFSA purposes.
While you could certainly request each college to review your situation because you want a professional judgment adjustment to your income to remove the amount of pass-through income, I wouldn’t hold my breath on the adjustment happening (or making any difference to your aid).
It’s a choice you make, just as the federal government has made the determination that they are going to consider that income available to you to pay for your child’s college. Again, though, you can ask each school to review your situation.
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Just curious—If you pay the bonuses before year end, then they would be a business expense and not retained earnings and therefore wouldn’t show up on your k-1?
If so, you could perhaps consider that for future years.
That’s a great question and I have no idea, but assume the CFO has reasons. We don’t run the business, just have an ownership %. I wouldn’t even be able to take a distribution of money to pay for college if we did want to drain the business of money it needs. I feel like not all K-1 income is equal, but FAFSA treats it like it is. There’s no way I can be the only person with K-1 income to report but not have access to that money.
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Basically, as I understand it, if it shows up on you AGI — or it is specifically asked about on FAFSA— it needs to be reported. And if your student applies to any colleges that use the CSS Profile, then a lot more questions are asked.
But as was noted upstream, you can always ask for a professional judgment review to assess your particular situation. But as was also noted by @kelsmom, these reviews aren’t always successful.
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Presumably, there is some financial benefit to you in owning this business.
Just know that any Profile schools, typically the ones with more need based money to award, understand that very well. They may well delve into the details of the business in order to determine what they consider your ability to pay.
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Are you saying you’ve been paying taxes on S Corp income over the years with no reported loss, no distributions, and no change in the value of the equity you hold?
I’d probably worry more about that than FAFSA issues.
Look, I’m about as sympathetic an audience as you’re likely to find for complaints about some of the complications S Corp structures can cause for those applying for FA. The variability between reported income and actual distributions is one of those.
But for most folks this is more of a timing issue. Years of losses or treading water mixed with one year of reported income mixed in can really throw a wrench in the FA formulas. In some cases FA offices might be sympathetic if there are unusual reasons for this. But in the end, yes, K-1 business income is income for FAFSA just like it’s income for the QBI deduction.
If this is a family business you might want to look into the small business exclusion to see if you qualify. This is for asset reporting, not income.
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I don’t know the specific answer to your question, but generally if you are an owner in a business, you are deemed to have earned and received all the income that appears on your tax return even if it is reinvested in the business.
I was once a partner in a large partnership that regularly reinvested money into the partnership, made charitable contributions on the partnership’s behalf, etc. As one partner with a small interest, I could not have stopped those investments or contributions if I wanted to. However, I was deemed to have earned that income for things like calculating child support, including the share of child support earmarked for tuition. I didn’t file a FAFSA at that time, but I assume it would have been the same. It doesn’t seem “fair” when you know as a practical matter you receive only $X net to live on, no matter what, but business owners generally get other privileges and tax breaks, so government agencies are not very sympathetic.
Perhaps you will have better luck with individual schools, but I suspect they will see it as you choosing to use disposable income to further the family business, a business that in itself is an investment with significant value that could theoretically be liquidated to fund tuition in the eyes of financial aid administrators.
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No, the business makes a distribution in the amount of taxes that are owed on the business activity. Then we pay that straight to the IRS.
Maybe there will be a benefit someday? Like years down the road if it sells or liquidates? But that doesn’t pay for college now.
Thanks everyone for your thoughts. Sounds like loans are in my child’s future 
Maybe these questions better taken up with the other business owners, explaining how you are being penalized in terms of how you will pay for college and finding a business solution to your issue brought about by the business’s choices/decisions?
Be aware that a student is limited in the amount of loans they can take in their own name.
That is $5500 first year; $6500 second year; and $7500 for each of years 3 and 4.
Other loans will need to be either co-signed or parent-only loans.
Or they can look for colleges where they are likely to receive significant merit awards.
Depending on where you live, there may be partnerships with other nearby public colleges (like the WUE schools for the west coast). And some of the Canadian schools are less expensive, although that may be major dependent.
Wishing you luck.