<p>This is posted on a local university website:</p>
<p>Sounds like it could help some of our CC family!</p>
<p>Good News for Families who own a Small Business!
Until recently, families were required to report the value of a business on the FAFSA; however, a new change in the FAFSA reporting requirements excludes as an asset the net worth of a family-owned and controlled small business. For FAFSA reporting purposes a family-owned small business is one that has 100 or fewer full-time (or full-time equivalent) employees and is owned and controlled by the student or the dependent student's parent(s). Did you include the value of your family owned small business on the FAFSA? Let us assist you on determining whether you may now correct your FAFSA to exclude the small business value.</p>
<p>So if a parent owns a small business, the value of the business doesn't count, but the income that comes from the business does, correct? thanks.</p>
<p>This is part of the HERA legislation signed in February, effective in July of '06. Previously, FAFSA considered any business equity (assets less liabilities) as a reportable asset. They counted less than personal assets, but they still counted. Effective the '06/'07 FAFSA, small businesses with under 101 full-time employees need not be reported on the FAFSA.</p>
<p>That's the FAFSA that most completed almost a year ago--but the legislation was enacted after the FAFSA instructions were penned, and after most had submitted the FAFSA.</p>
<p>Doesn't affect Institutional Methodology.</p>
<p>So for FAFSA, yes, the value of the business is excluded, but the income from the buiness counts as income. This could be a big change for students whose parents run small business, if the assets of the business were a significant contributor to the FAFSA formula previously.</p>
<p>Don't know if the FinAid calculator has been changed to reflect this yet, but it should be easy to test.</p>
<p>So a way to shield assets from the reach of FAFSA now would be to retain earnings in the small business. Hardly seems fair. I wonder what the policy reason was for this change?</p>
<p>md4, I would use the calculator off the top line of the menu. Its output shows exactly how the formula works. Not too sure about the "quick" version you reference.</p>
<p>"So a way to shield assets from the reach of FAFSA now would be to retain earnings in the small business." No change in the treatment of business income, just business equity (assets less liabilities). So to the extent that a small business owner can plow profits back into the business, yeah, that can lower his net and reduce his income. But that's always been the case.</p>
<p>"does income put into a retirement account, like a self employment pension still count as income for that year?"</p>
<p>Yeah-- retirement account contributions are good from a tax standpoint, they lower your taxable income. But the aid formulas add that amount back in later, so they end up counting as income. No change as part of the HERA legislation, as far as I know (the legislation is long and mind numbing, and I've not seen a good summary of the parts that impact financial aid).</p>
<p>50/50: That's my understanding as well-- you own half the equity in the business- you'd have to report 50% of the equity previously. Now not at all on FAFSA, if a small bus.</p>
<p>SB7, where on FAFSA does it ask about business income? What if it is a corporation and not just straight Schedule C income? It seems now that a family corporation can use income to build up cash reserves rather than pay it out as salaries and have that dough escape the reach of FAFSA.</p>
<p>Business income (schedule C or otherwise) should be reflected as part of the AGI on the 1040, which translates to question 79 on 07/8 FAFSA. </p>
<p>Business EQUITY (which is what this thread is really about) is question 89 on the 07/08 FAFSA, but it has a note about special treatment for family farms or family businesses.</p>
<p>Don't know about small family corporations building cash reserves (business assets) rather than paying out salaries (income), in order to maximize aid. Sounds a bit too easy and too good to be true-- this is a new law, and sometimes new laws have unforeseen consequences. Here's what Princeton Review's "Paying for College Without Going Broke" (my fave reference on this stuff) has to say on this point:</p>
<p>"Obviously, these rules may well be changed if and when Congress determines that this new law is being exploited. For example, if too many people start placing their investments into family partnerships or corporations established solely to qualify as "family businesses" for aid purposes, Congress may quickly close this loophole."</p>
<p>
[quote]
Yeah-- retirement account contributions are good from a tax standpoint, they lower your taxable income.
[/quote]
I haven't done the math on this, but its important to note that on the FAFSA, the actual income taxes that the family pay ARE subtracted from income.... so the tax reduction gained from the retirement contribution would have the impact of raising EFC.</p>
<p>What I don't know is whether the tax benefit would generally outweigh the EFC increase. I used online calculators for a couple of hypothetical scenarios, and it seemed like the tax benefit was about double the increase of EFC -- I got a factor of 47% increase in EFC related to the taxe reduction. (In other words, for every $1000 saved in taxes, EFC rose by $470). </p>
<p>But this didn't factor in the added benefit of sheltering more assets in retirement funds - every $10,000 in the parents bank accounts ALSO raises EFC by about $560. When I factored that in, subtracting the retirement contribution from cash on hand, I saw that EFC now rose by a much smaller fraction. </p>
<p>So basically, I think I will be spending some time with my CPA this year working out various scenarios. It seems to me that if the overall goal is for the family to save money, then its worth taking the hit on the EFC to shelter more dollars in retirement assets and to gain the tax benefit. What I have to do for myself is factor that against the interest costs on a PLUS loan, since my personal dilemma is figuring out whether its better to borrow for school + save for retirement, vs. not saving but remaining debt-free.</p>
<p>SB7 we are in complete agreement now. That sound you hear in the background is the whoosh of 1000's of Schedule C businesses being incorporated.</p>
<p>In regard to the business being owned with a non-family partner 50/50...my question was if that would still qualify as a family owned small business...or does the fact that there is a partner exclude it from the definition of a family owned business, for FAFSA reporting purposes?</p>
<p>I don't believe that it would exclude it from being a family business. The instructions on the 07/08 FAFSA worksheet say "Do not include the value of a small business that you own and control that has 100 or fewer full-time or full-time equivalent employees." Not sure if the actual instructions for the 07/08 FAFSA (which I think will be available in a few days) explain further. I'm not aware of any clarification or guidance on that issue.</p>
<p>I am a physician who co owns a small practice with two other Drs. We have eight employee including the Drs. Do I qualify to not send in the business return? I did send it two years ago when my older son was a freshman but not last year since we received no aide. But I was going to apply this year since I will have two in private school at the same time. And I am only a pediatrician we are not the big bucks kinda Physician ( some advice for all those pre meds, Don't pick peds if you are doing it for the money cause it's not here)</p>
<p>My hubby is a doc in private practice (does mostly house calls) and has no employees. We did not report his practice as a family business but that he was simply self employed</p>