<p>My husband and I own a small business (Sub-chapter S). In a normal year, we draw a salary from the company and receive a W2. At the end of the year, we file a tax return where we add the amount on the W2s + any profit realized by the Sub-Chapter S company and pay income tax on the result.
Midway through 2008, we acknowledged that sales were so abysmal we could not even cover our overhead. In July we stopped paying ourselves a salary and lived as cheaply as possible on some savings. At the end of the year, we added our W2s for the first 6 months ($150,000) to the loss (-$400,000) in the Sub-chapter S, and presented the -$250,000 loss to the IRS which promptly sent us a refund (for the estimated taxes we had paid until July when we still thought that sales would be normal.). Essentially, the IRS recognized that the so-called salary until July had just been a depletion of the equity in the Sub-chapter S.
So, as far as we are concerned, we earned $0 in 2008 and the equity in our company went down from $400,000 to $150,000, which barely covers a minimum amount of inventory. </p>
<p>We filed for financial aid, fully expecting that DD would receive something from her Ivy school. Since she has a small amount of personal assets ($25,000) and we are aware that the school would take our home equity and our business assets into account, we did not expect a full ride, but we expected <em>something</em>.</p>
<p>The school wrote me again today that our 2008 <em>positive</em> income was $150,000 and that, plus our assets, makes DD ineligible for financial aid. I have tried twice to explain to an assistant director that what she calls a salary was really just equivalent to withdrawing from a savings account, but she just repeats, mantra like, that W2s are positive income and it is the formula. I could understand this if we were trying to offset another source of income with a business loss from the Sub-Chapter S, but this so-called income was withdrawal from the companys equity, i.e. from income we had earned in previous years.</p>
<p>My question is: are Ivy League schools obligated by some federal rule or some Ivy League agreement to use such an asinine formula, or should I try to talk to somebody with more authority (or more accounting knowledge) in the FA office?</p>
<p>They aren’t legally bound by anything to use a certain formula; schools can give as much or as little aid as they want. I’d talk to someone higher up, try to go there in person with documents supporting your case if possible.</p>
<p>What was your adjusted gross income? Was it $150,000 or did it include your business losses? Did the college look at the tax return for the sub-S?</p>
<p>They are bound by their own rules. Small business owners typically get the shaft. The schools don’t allow much of what the IRS does. They add back losses. You can take it up the chain, but I think the answer will remain the same.</p>
<p>Just an outsider thought - but most of our friends that have small businesses run so many of their “living expenses” through their company…like cars, memberships, social expenses, cell phones, entertaining at their home if they invite customers…all kinds of day to day things that others pay out of salary income. If you are not running those kinds of expenses through your company and can prove it, you might have a stronger case, otherwise on the surface it looks like you took $150,000 as salary over the course of 12 months even though it was compressed in the first six months and the college probably figures you run many other living expenses through the company leaving you with an ability to pay tuition. Who knows how it works, but colleges definitely don’t look at your income/assets in the same manner as the government looks at your “stuff” for taxation purposes.</p>
<p>Without looking at your Schedule L, M1 and M2 (and K1) of 1020S, nobody can rightfully comment on your money transfer between your S-corp and family account. </p>
<p>A S-corp owner must be on payroll with all the required payroll taxes withheld and paid. </p>
<p>If the Accum Earning acct shows a profit, then the shareholder can take a non taxable distribution. Actually, the tax assessment on distributions from a S-corp is based on the shareholders basis in the shares, not Accum Earnings. By definition as a pass-through entity a S-corp cannot accumulate earnings. Perhaps you were referring to the accumulated adjustments account?</p>
<p>Without payroll, the irs can say you evaded taxes and that is illegal. </p>
<p>You may be better using your accountant to explain your operation with the correct terminology to FA officers, in order to avoid wrong impression.</p>
<p>I think Notri said it correctly - if the $150,000 appeared on your w-2 then it is income. If it were a FAFSA school, losses would be reported as zero. They do not know or care if the loss is $100 or $100,000 - I agree that the accountant may be able to speak more clearing to FA to possible help your case but the w-2 is eveidence of income.</p>