Question about the CSS Profile and family business

Paying for College
1

I have a question regarding assets and having a business. I know that a student’s family can have up to approx $50,000 in assets before those assets are to be used for financing education. I assume this means in brokerage accounts, checking and savings accounts. What about a business checking account. If a family files a schedule C does the money that is in the business account count as an asset for CSS profile purposes even if that money is used to run the business. If a business owner regularly keeps, say, $20,000, in the business checking account will that money be counted as an asset or is it part of the business.

Thanks!

2

First…the asset protection allowance has dropped considerably. I don’t think it comes close to $50,000. It’s somewhere in the low $30k range.

@annoyingdad I’m guessing you can give info about the business assets.

ETA…another thing to remember about family businesses…there are some deductions allowed by the IRS for tax purposes that are not allowed for financial aid calculation purposes. There are many schools that will add back some business deductions as income when they calculate your need based aid. This varies by school…just FYI. Some business owners are very surprised when this happens.

3

Thanks

4

And I understand assets have to do with the age of the older parent.

5

What are you asking? Your business assets will be included in your schedule C, right? Most Profile schools will want to see your tax return including ALL schedules.

6

I am asking about the contents of the bank account. Cash on hand.

7

Any cash on hand needs to be reported someplace…even if it’s in your mattress or freezer.

Were you thinking you would put some personal assets into the business account to hide them? What is your question?

Hoping @annoyingdad sees this thread.

8

No it works the other way around. Our business is service oriented. We get checks from customers. They go into the business account and we report them as money earned. We then pay our business bills and report all of this on the schedule c. That money remains in the business account and we move money to it personal account when we need it for the mortgage, for example, paying bills, buying shoes. Normal stuff. That money is also used to buy equipment for the business. It goes both ways and fluctuates. It can range from $20,000 TO $60,000 depending on our needs. We need to purchase a van for example. It is going to drop by $25,000 soon. So is this fluctuating money, which is the reported alrwady to the IRS as profit from our business get counted as an asset.

I am trying to understand what we are going to end up paying as tuition but I don’t know what is counted as an asset. The money in the business account had been reported in the taxes but it is still liquid and in the bank.

9

Yes…so some of your personal expense money is kept in your business account “until you need it”.

Really, your need based aid is more based on your income. For business owners, the questions arise when the gross income is substantially more than the net income. Like I said, it is very possible,that some of your business deductions allowed by the IRS will be added back in as income for financial aid calculation purposes.

The family contribution is driven mostly by income. Assets are assessed at a much lower rate than your income.

I will toss out some guesstimate numbers…if your gross income is in the $100,000 range, your family contribution would be in the $25,000-$33,000 a year range.

If your income is $200,000, double those numbers.

Remember too…that most colleges don’t meet full need. In addition, for the schools,that do meet full need, some are much more generous with the awarding of need based aid, actually giving some to families with earnings on the $150,000 per year range. But really…this is not the rule…it’s the exception…and the schools are highly competitive for admissions as well. So,the first hurdle would be getting accepted.

The big question is…how much WILL you contribute annually for your kid’s college education? That is the signal. Everything else is the noise.

10

Well what we will contribute will depend on fluctuating business income. We are a plumbing business. Our gross would be before the SEP IRA, health insurance, and Self Employment tax - am I correct? My kid is interested in several private schools all with guaranteed “demonstrated” need. and I think we can contribute between 15,000 and 20,000. Our business income can change from 70,000 to 120,000 (before taking out the SEP, insurance, and tax) - depending on that one great contract, or that one broken down cargo van, or that one purchase of a jetter ($45,000!).

So here is a hypothetical. There is a $30,000 expense coming. A business van. Three options. How does each effect what a college will see as available for tuition?

1)We can save up that money and have $30,000 sitting in the business account to be ready. Maybe we are lucky and we get another 2 years from the van. The money sits for 2 years untouched. (Is this now a $30,000 dollar asset?)
2)We can remove that money and spend that money on a luxury car for ourselves (this is a hypothetical I drive a cheap Hyundai) and finance the van. The money leaves the business account for personal use. The 30,000 is no longer liquid and sitting.
3) We can remove that money for personal use and invest it in a brokerage account which will turn it into an asset- and finance the van. Now our brokerage account has increased by 30,000 and we are worth more. We pay off the van over the next 5 years.

So the money is in one of three places - business acount, pocket, brokerage account. Does this make a difference.

Yes I understand that assets are considered only a small amount of the total income but that 6% - $3000 or $5000 is significant to US.

@Thumper1 I get the impression you think we make a lot of money and are trying to hide things. We don’t and we aren’t. The choice we make, like buying vs financing a van will have a huge impact on our ability to do other things. Our business covers us. A good month? Lets go out to dinner a few times. A bad month. Not as much. Something as simple as deciding whether to purchase outright, or finance a van is a real situation we are in right now. Do we leave that money in the business account or will it hurt us? Is that money that we are saving for a rainy day an asset or is it simply money that is ignored by a college.

1 Like
11

Oh and @thumper1 We also have home equity! So does that change your estimations?

12

Home equity will be counted as an asset at many CSS schools.

Since you own a business and likely take many business deductions, then the NPCs will not be accurate for you.

The savings in the business would get counted. Yes, it gets counted as income, and while it sits in the bank, it gets counted as an asset…on the day you file FAFSA and CSS.

The CSS Profile schools may shock you by adding back in many expenses (cell phones, automobiles, the "employer half of FICA, and a whole host of other deductions).

PLUS…CSS schools are going to assign a VALUE to your business. For instance, if you sold the business to another plumber, the business has a VALUE.

Also…all of the equipment has a value…trucks, machines, inventory, etc.

so…to protect yourself from a possible shock, have your son ALSO apply to a few schools that you KNOW FOR SURE will be affordable…maybe because he’d get awarded large merit and/or it’s a FAFSA only school and it will give aid.


[QUOTE=""]
My kid is interested in several private schools all with guaranteed "demonstrated" need. and I think we can contribute between 15,000 and 20,000.

[/QUOTE]

Again, since no one knows how these schools will determine your “demonstrated need”, you need to insist to your child that he also apply to 2-3 schools that you know FOR SURE will be affordable because of either ASSURED grants/scholarships and/or family funds.

13

@mom2collegekids Thanks!

So how does the school assign a value? We don’t even know what our business would be valued at.

And he does have a healthy list but he is most interested in SLACs and most seem to be profile schools and so it is like applying to a black hole and is very confusing. Also just asking questions on this board seems to make people assume that we are trying to hide our assets. I am just trying to understand the definition of assets in our case!

Thanks again.

14

From what I’ve read from other business owners who have posted here on CC, first you’re supposed to put a value, and then they will alter it if they think it’s too low. I imagine that they have some sort of “kelly blue book” for businesses… :wink:

What I mean is, they may have some sort of file with various common businesses, and if a certain type of business typically grosses around $XXXXXX per year, and likely has the typical equipment that such a business would have , then they would believe that its value is $ZZZZZZ. So, if you were to put something like $5000, then they would believe that you were undervaluing it.

Since your business is a plumbing business, which is a commonly owned business, likely there is already some way that the business is valued.

15

What is your gross income…before you add in all of your deductions?

Yes, at many Profile schools, your home equity will be counted in some way. Some don’t count it at all. Others cap at a %of your income, others use a higher number. The rationale is that you could borrow against your home to fund college costs, especially if you have a lot of home equity.

Above all, you need to be very realistic in your search for the most part. Sure, include schools that are costly. But you need to explain right now to your kiddo what will happen if the money isn’t forthcoming from the colleges.

16

@thumper1 what do you mean by gross income because we can do gross receipts, gross profit after profit loss statement, gross income on the 1040 before deductions. What specifically are you asking?

17

LKnomad – You’re asking good, reasonable questions. Unfortunately, Profile schools can each make choices about how to interpret the business information you provide on Profile, the business supplement (only requested by some schools), and what they take from your tax returns, including business tax returns.

In general, schools that use Profile will look at your income as a business owner as being the income you report on the 1040 line 12, and they will add to that the amounts you report on lines 24,25,27,28, 29, 32. To that total they will probably add the values from your Schedule C for lines 12, 13, 30. It is possible that they might look at the detail in Part V, other expenses, and add back some of that, but it is harder to predict.

So, from an income standpoint, you can make a pretty good guess if you use your 2014 tax return and add up those items. (Obviously, if either of you also has wage income from another job, or interest/dividend/capital gains income, that will also need to be added.)

FAFSA-only schools will not consider the value of the plumbing business, as long as you do not employ a plethora of plumbers. (I can’t remember whether it is 100 or more or more than 100 employees, but it is far above the number employees found in most businesses.)

Profile schools will ask you to value the business. The question is, how much could you sell the plumbing business for in a quick, cash sale? So, you have assets, which include cash-on-hand, plumbing fixtures, truck(s), tools, equipment. You have a customer list. You presumably have contacts in the industry to figure out how much of plumbing business like yours would sell for. It is usually a smaller value than you’d like unless the business owns real estate. Sometimes a business broker might be able to give you an estimate, or there might be a similar plumbing business for sale in your town/city/market. I would not spend a huge amount of time trying to value the business. If it takes more than an hour, you’re overthinking it. Colleges understand that businesses need working capital. If some of the cash-on-hand represents deposits from customers, the balance sheet should show that as a deposits from customers, not as cash freely available to you. In the same way, a lawyer’s trust account isn’t properly part of the value of a legal practice, and customer deposits in checking accounts aren’t part of a bank’s value.

18

Thanks @arabrab - This was really really helpful. I guess I am trying to get my head around this now because we have some business decisions coming up and understanding how everything affects possible college amounts is a part of those decisions. Things like purchasing equipment, changing the structure of the business (going from sole proprietorship to corp), it just seems like anything we do will affect things one way or another and it is making me crazy.

So it sounds like some places will add back in depreciation, depletion, and use of home as well as taxes, IRAs, and health insurance. Did I read this right?

Are schools willing to discuss financial aid when a student is applying for a school or is it considered proper to wait to talk only to schools that have offered acceptance? I would love to figure out which schools look at businesses which way. Looking at Pomona, Reed, Oxy, Harvey Mudd, and CalTech.

Thanks again.

19

What is your gross income before expenses? Is it $500,000 with an AGI of $50,000? Or is it $150,000 with an AGI of $30,000?

I don’t think my question is that hard.

This is the income on your personal tax return. What is it? Of course, you don’t have to tell here…but think about that.

And like I said…some of those business deductions can be added back in as income for financial aid calculation purposes.

Things to consider:

  1. The value of your business will affect your need based aid. And yes...your business has a value.
  2. Some deductions allowed for IRS tax purposes for businesses are not allowed by some schools for financial aid calculation purposes. These could be added back as income.
  3. I'm sorry, but it does sound like you are mixing your business with personal money...keeping money for personal expenses in your business account until you need them. I'm guessing this is allowed, but if your reported income doesn't look sufficient to support your bills, the school rightfully can ask for documentation.
  4. If your in me fluctuates considerably, look for merit awards that are not based on income.
20

Too late to edit.

  1. For fafsa only schools, your business income will not need to be reported. BUT these schools do. Not meet full need. The fafsa really determines legibility for federally funded need based aid. If you are not low income, you might get nothing but a $5500 Direct Loan.

And…some fafsa only schools use the fafsa info for institutional aid. Some of these will also ask for your tax returns with all schedules. All will want you to link to the IRS Data Retreival Tool. When calculating awarding their money, colleges can ask for any information from you…and this could,include your tax return with all schedules.

  1. Arabrab gave you excellent advice about what might or might not get added back as income.
  2. Some colleges will give you an early read for financial aid. This would be an estimate only. So ask at these colleges. Some will do this, and others will just say no.