<p>I was talking about financial aid to a relative whose child is a few years away from applying to college. The family has a small business but their main source of income is a salaried job. Evidently, as a result of lots of business related tax deductions (including portions of the housing costs), the gross income is $175K but the taxable income is $55K. They have a business inventory, too.</p>
<p>How will that likely play into the calculation of their efc? Would FAFSA only and Profile schools consider their income as $175k, $55k or something in-between?</p>
<p>It is possible for the financial aid staff to decide to take a close look at all the deductions, recharacterize things, and recalculate the income and asset values. This takes a fairly sophisticated and well-trained staff member a lot of time to do. There are special seminars that FA staff can attend to learn how to do small business examinations.</p>
<p>My understanding is that an indepth review rarely happens, though if you are unlucky and it happens at your kid's dream school you just might get a huge disappointment. One nugget of advice is to file the papers close to the deadline. If you file early in January, some staff member might have enough time to give your small business the thorough look. Close to the deadline you will more likely get a pass and unexamined acceptance of the Profile numbers.</p>
<p>I asked a similar question earlier this month, and unfortunately the answer wasn't good. FAFSA looks at adjusted gross income, not income net of business expenses. Here's an article that was useful to me:</p>
<p>Well, its not quite that simple. If the business income is reported via a Schedule C, then the AGI is computed from the bottom line on the schedule C, which would be after taking all business deductions. That is, if the business grosses $175K, and after all deductions are subtracted out there is $55K, then that is the figure that will be used to compute AGI on the tax returns. Additionally, on the tax return, there are reductions that apply only to self-employed -- such as subtracting out one-half of the self employment tax, and a self-employment health insurance deduction of applicable. </p>
<p>A FAFSA-only school (most publics) are going to accept the figures from the 1040.</p>
<p>Colleges using the CSS Profile will usually want to look at the schedule C, and they will add back certain expenses into income - including writeoffs for business use of the home, car expenses, depreciation writeoffs. It can be helpful to write a letter to financial aid explaining particular circumstances -- for example, if the business requires a large amount of driving or a specialized vehicle like a van, then its a good idea to explain these things. But of course it is hard to predict what the college will do.</p>
<p><em>hard</em> business-related expenses, such as cost of inventory, employee payroll, etc. - will generally be respected.</p>
<p>I think this relative's business must lose money on paper because combined salaries from employment (not the business) is, I believe, in the mid 100K region. Part of why it probably loses money on paper is that they use the home as one locale for the business and their housing costs are hight.</p>
<p>While I don't feel comfortable asking the particulars, I'm also feeling like I don't know enough to give good advice.</p>
<p>A lot of small businesses lose money on paper yet generate nice lifestyles for the owners. All perfectly legit from a tax and accounting viewpoint, but not an accurate reflection of the ability to pay college expenses. So yeah, Me Mom, might be a good subject to avoid.</p>