Please let me start by saying . . . I REALLY don’t understand this stuff! If you are able to answer my question, please do so in very layman’s terms or I will be just as lost, stressed, and confused as I am right now! Thanks!
I submitted the FAFSA in mid October, but am now concerned I made a huge error. We own a small corporation and get a K-1 form 1120S each year with an amount on line 1 (ordinary business income) that shows up on line 8 of our 1040 and is calculated into our AGI. On the FAFSA, on the line asking about parent income, I now see it says to enter info from the K-1 1065 line 14 but nothing about K-1 1120S line 1. I included that amount as income. It is a huge part of our income, as we take that amount as shareholder distribution. Was I not supposed to include it? If I don’t include it, that is a huge discrepancy between our AGI and wages, and makes it appear that we make a lot less money than we do. Would it not appear odd it, for example, my AGI was $70,000 but my wages were $45,000? Please help!
I am not a CPA but a former banker that also frequently reviews business tax returns.
I think it should be listed as income since they were distributions from the business. It is still income even if it is not wage income.
Your M-1 form should reflect this distribution.
Feel free to double check me but fairly sure I am correct.
Just read up a little to check myself/get a refresh. Seems like M1 is what you need as it is the actual distribution to you. K1 shows total taxable amount but this could include loan repayment or taxes incurred by the business which is not income per se.
Again, not a CPA. You might want to double check me with your CPA but believe I am correct.
Sure, meant to say could include business taxes paid not taxes.
I tell all my clients (business owners) that they need to surround themselves with a good team both internally (CFO, COO, head of Sales with clear division of roles with separate positions/multiple sign offs for AP, AR, payroll and authorized bank/check signers) and externally (CPA, business attorney, banker, financial planner perhaps, M+A firm etc).
Business income from the 1120s k-1 flows through to your 1040 and ultimately is included in your AGI (as you say).
AGI is what you report on the FAFSA. Yes, it already includes that business income.
Income from work will include your W-2 wages and NOT any business income.
Distributions from pass through entities are not reported on the FAFSA and are irrelevant. What matters is the business income, which passes through and is incorporated in the 1040 AGI. Whether the business chooses to distribute to owners doesn’t affect business income or AGI.
Nothing from the 1120s is reported directly on the FAFSA.
Since an S Corp is a pass through entity, the relevant amount is business income from the K1 that flows through to the 1040 AGI.
Business income may or may not be related to any distribution amounts. But in either case, distributions are neither taxable nor reportable on the FAFSA.
There’s a common misunderstanding that when an s corp distributes money to a shareholder it must be income. But it isn’t, because it has already, at some point, been reported as business income, taxed as such, and reported on the FAFSA in the relevant year (due to being incorporated in the AGI). A distribution is simply a decision to move these already-taxed and reported funds from the s corp account to the shareholder accounts.
Thanks for the clarification. Perhaps you are a CPA? I thought M1 distributions didn’t show up that way but this also could just be my ignorance about FAFSA as I have just filled it out twice and I don’t own an S Corp.
Thank you! So, it is not suspect in any way when the self reported wages and the AGI as electronically transferred from the IRS DRT are not the same? My AGI will be tens of thousands of dollars more than what I report as Income on line 86, but you are saying that is just one part of the puzzle, right? Since that amount is a part of how we pay our bills, it just seems like I’m being misleading.
Seeing as I already submitted the FAFSA 5 weeks ago I guess I need to go in and correct it. I feel like it will draw negative attention. So stressful. Thanks again for the info!
There is no issue with the two not matching. There are a number of reasons why they wouldn’t match. A lot of people are confused by this, but it’s nothing to worry about.
Thanks. So confusing. So since it is reported as part of AGI I do not need to include the amount under any other question on FAFSA? I think it is the DRT thing that makes it feel odd, because I didn’t actually type in a number that includes that amount and it doesn’t even show on the SAR, just says “transferred from IRS”.
So I should go in and correct it, or it’s a common mistake that the schools will fix when they see the error.
On another note, I did the same thing on the CSS for Parent Income. The question is, “How much did parent earn from work?” Should I also go in and take the amount out from that question?
Hi Kelsmom, just wanted to say that this thread was super helpful! I have just invested in oil and gas and was told by our FA that it is an above the line investment that could be helpful to lower our reported income on Fafsa/CSS Profile. Do you think this is accurate?