<p>I own a small business that's currently an S Corp. Roughly 20 employees. It's our families only source of income. My oldest child is a sophomore in HS (will be a Junior in the fall).</p>
<p>I'm trying to read up on how EFC is calculated and whether it makes sense to be a C Corp instead of an S Corp. </p>
<p>a. Is there an advantage to being a C Corp?</p>
<p>b. How do I figure out if its worth the cost of double taxation for profit in the C Corp assuming that's distributed at a later time?</p>
<p>c. How are assets in the business treated in terms of calculation?</p>
<p>d. Are there professionals who specialize in this kind of thing? Are they worth engaging?</p>
<p>Any help or pointers would be appreciated.</p>
<p>The problem with advice in this area is that you probably are not going to get much out of your FAFSA EFC anyways being an owner of a 20 person company. Unless your income puts you close to poverty level, there really is no guaranteed money. The PELL and most state guaranteed low income grants that use FAFSA have low threshholds. And that is all a low EFC guarantees you in terms of grants. It also allows for subsidization of a few thousand of the $5500 Stafford loans that all students are eligible to get if the cost of the school justifies it.</p>
<p>Those schools that use FAFSA only do not tend to meet full need anyways. Look at the schools your kid is considering and eyeball closely what they give out in terms of financial aid and put your numbers in their own calculators. If, for example, your kid loves Penn State, it isn’t likely to make a darn bit of difference whether you are S or C corp and if there are any benefits outside of changing the FAFSA EFC a few dollars in terms of your business, you should stick to that as the reason for choosing the type of corp you are.</p>
<p>When it comes to private school, and that is where you find some that will gurantee to meet 100% of need or most of it, they can look at your assets and business any danged way they please and they can all do it differently. Some of these schools look at your savings accounts for the student’s siblings, count your home equity in full, want the value of your cars, will take the value of your kid’s savings account and make it the figure used for 4 years, will take the value of the fillings in your teeth. (well, maybe not the last thing, but you get the gist). They may not give a hoot whether you are C or S Corp. Their job is to find every possible source of money in your family and dig for it and preserve the colloege’s resources. You should call a few schools’ financial aid offices and ask them outright. Get a financial aid counselor and see if they will give you an estimate or give you their estimator, and give you a verbal answer to your question.</p>
<p>The FAFSA formula is revised each year. Here is the current version: <a href=“http://www.ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf[/url]”>http://www.ifap.ed.gov/efcformulaguide/attachments/101310EFCFormulaGuide1112.pdf</a></p>
<p>You can print it out and work through it on paper to see if there would be any difference for your family with a C or an S.</p>
<p>It may be easier for you to just determine how much you can pay, and then have your child track down colleges and universities that either fit inside that budget, or that offer guaranteed merit-based aid (if you child qualifies for that aid) that would bring the cost inside your budget.</p>
<p>As the owner of a small business employing less than 100 people, the net worth of your business is not reported on FAFSA. This is if your family owns and controls more than 50%, and doesn’t matter if it’s an S corp or a C corp. </p>
<p>Colleges that use the CSS Profile in addition to FAFSA will often ask for business information, including IRS Form 1120S & 1120s K-1s. So for them, it’s not clear that a C corp is preferable to an S corp. The value of the business is probably used in the same way for Profile colleges - in other words, it wouldn’t matter the legal setup of the business, the value is still reported and used in their formulas.</p>
<p>The main difference between the two types of corporations, as you know, is the ability to retain earnings in a C corp while an S corp needs to distribute all earnings to the corporation owners at the end of every tax year. So for a C corp you have the option of “hiding” earnings, or delaying the reporting of them, which would lower your AGI for some number of years. The AGI is the main determinant of family EFC, so to the extent you can keep your AGI low, your EFC will also be low. However, as cpt points out, a low EFC doesn’t necessarily translate into a good amount of financial aid.</p>
<p>Use the formula in the linked document to determine your EFC right now.</p>
<p>And then play with scenarios where your AGI is reduced to see what difference it makes to your EFC. If your EFC is above $25K or so, you won’t get any need-based aid at most in-state publics. If it’s above $60K, you won’t get any need-based aid anywhere. </p>
<p>Bottom line: would changing the incorporation of your business cost more in terms of legal expenses and double taxation than it would save in (possible) financial aid? I’m guessing probably not, but you can look at the costs and figure out a break-even point, then decide.</p>
<p><cross-posted with=“” vballmom,=“” who=“” said=“” pretty=“” much=“” the=“” exact=“” same=“” thing.=“”></cross-posted></p>
<p>Also remember that that accounting, tax and legal costs of a C corporation are higher than the S corporation (which is simply a pass through entity), so there will be higher costs every year. So a lot depends on how you expect the company to grow in the next few years. If you expect that you will bring in partners, provide other benefits to employees, then it might be worth the cost to bite the bullet now rather than later. However, if you do not expect the governance structure to change, then C corp may not be worth it.</p>
<p>Buy “Paying for College without Going Broke” by Kalman Chany, Princeton Review.
Get the 2010 & 2011 Editions.</p>
<p>I own an S-corp and decided to keep it that way after reading “Paying for College without Going Broke”, only the 2011 edition. I agree that it doesn’t matter for FAFSA, but it does for the private schools using some variation of CSS Profile. You have to work your own numbers, but some general answers to your questions:</p>
<p>a - Probably no advantage to C corp.</p>
<p>b - It really helps to shift income away from AGI line on your 1040, during the 4 financial aid base years that begin January 1 of your student’s junior year in high school. In general terms, this means keeping income or assets in the business during that time, whether C or S corp. SEP IRA becomes an even better idea.</p>
<p>c - Family-owned business has to be listed on CSS Profile, but is “assessed” at a lesser rate than personal assets, at least according to that book.</p>
<p>d - This is difficult because CSS Profile stopped publishing its algorithms for 2011. Unlike with taxes and the IRS, you can’t plan in detail. You can look for the 2010 version of the book as SLUMom suggested, but it will gradually go out of date. Also, each private school can tweak the CSS Profile’s basic algorithm. The book does point out reasons why tax advice differs from financial aid advice. </p>
<p>Stanford University has an on-line financial aid calculator using their version of CSS Profile. Other schools will differ, but I suggest you might play around with that (or another school’s) to get some idea of where you stand. I wouldn’t just assume that your EFC will be high just because you own a business, and even if it is high, maybe there is something you can do about it.</p>
<p>We too are supported primarily by an S corp business and our income from it varies year to year. We inadvertenly lucked out when our second child of three started college. We got a good aid package since we had two in college and had a relatively low year income wise. Also, his particular college considered the cost of his sister’s private high school, which not all do. What we did not realize at the time, but now appreciate, was the the largest of the grants was guaranteed for four years. The business is doing better, S1 has graduated, and we would not now qualify for the same level of aid, but we are still getting the grant. Plus his college keeps the tuition the same for four years which also really helps.</p>
<p>Lessons learned - if you can shift income year to year, do it strategically, for example, lowering income when your first is a junior or when you have multiple kids in college and are more likely to qualify for aid.</p>
<p>Also, as your family starts to look at colleges, it’s worthwhile to research how they make their financial aid decisions. They vary from school to school, and even the rules vary for different awards, grants, and scholarships within the same school. Some schools have merit scholarships, some don’t. All use FASFA, but some also look at the CSS profile. Some meet need, some don’t. Some consider the cost of siblings private schools, most don’t. </p>
<p>It can make you nuts. The wide range of aid packages is one reason kids apply to so many schools.</p>
<p>Wow! Thanks so much for all of this input.</p>
<p>Looks like I’m going to need to do some research on how some of the possible institutions calculate their finaid. And I’m heading out to buy “Paying for College without Going Broke” by Kalman Chany, Princeton Review, 2011. </p>
<p>That said, do folks agree with the general statement by whydoicare?</p>
<p>“It really helps to shift income away from AGI line on your 1040, during the 4 financial aid base years that begin January 1 of your student’s junior year in high school. In general terms, this means keeping income or assets in the business during that time, whether C or S corp. SEP IRA becomes an even better idea.”</p>
<p>That’s pretty easy to do as a C Corp. Not sure how you would do it as an S Corp given that the K-1 flows through as income.</p>
<p>The calculation of cost-benefit seems to be pretty dang complex here. The comment “can make you nuts” feels right on.</p>
<p>I’m not so sure anymore about the AGI. There is another thread on CC about schools examining the 1120S during a pre-read, then adding back pension plan contributions, medical plans, taxes, travel, and who knows what else. No firm confirmation on how that’s done, just anecdotes. I’m wondering if a C corporation retained a lot of cash, what’s to stop the school from adding that back? They also seem to be creative in assigning net worth of the business, even though it’s listed right on the corporate tax return (block F or Schedule L).</p>
<p>Either way, there doesn’t seem to be an advantage for a C corporation over S corporation. Certainly not in my state, Pennsylvania, which levies 10% on C but nothing on S.</p>
<p>The Princeton EFC calculator makes it easier to run some what-ifs. In my case it’s “charging” me about 34% on marginal income from the S corporation, and 0% on S corporation net worth up to a very large number. However, there is no guarantee of getting that 34% without knowing how the school would evaluate my 1120S or 1120. Switching to a C would probably cost more than that 34%, so I still think it’s not worthwhile.</p>