I am a third (33.33%) owner/employee of a very small S-Corp and do get a W-2 and K-1 from the S-Corporation. This coming October 1st, I will be filling out both the FAFSA and the CSS Profile applications for the first time and have a couple questions:
Question 1: As a S-Corp, my salary (W-2) and K-1 (S-Corp) profits are already part of my AGI. Now, do I need to also report my share of the business (33.33%) as a business asset / net worth? They get me on the K-1 passthrough income and again on the business net value… Feels like double hit and it is not that we can sell the business to pay for college. A Small business that creates jobs, risks everything, pays taxes and provide for families. My business has 6 employees today including the (3) S-Corp owners/employees. We don’t have an office and work from home and site visits. We are in the low voltage installation service/home automation business.
Question 2: How do you estimate the net value of your business? I am planning to use the Balance Sheet. However, if you use the Accrual Basis report, the net value of the business is inflated as the A/R (account receivable), which are not in the bank yet are counted. If we use the Cash Basis Balance sheet then the business value is lower as it does not account for the A/R money that has not been received or deposited yet. Which method is the correct one to use or which method colleges expect you to use: Accrual or Cash basis balance sheet for small business net value/worth estimation?
I wish that there was more explicit guidance regarding S-Corp business and passthrough income, as well as if you need to report your share of the business, even though at the end of the year the profit of the company is distributed between the share holders/owners and goes into the AGI via K-1 income. With the new 2023-2024 small business changes, we need more guidance to properly comply. Hopefully, someone here has a better insight on how to approach the questions above. Thanks!
The net worth of parents’ current businesses and/or investment farms is not reported on FAFSA if a farm or family business has 100 or fewer full-time or full-time equivalent employees. Reporting a business value on Profile will probably depend on what each Profile school requires. I haven’t completed Profile in a while, and I cannot access the current version without logging in to a College Board account and going through the motions of filling out the form for a hypothetical student. Your best bet here is to contact the financial aid office at any school your student is interested in that requires the submission of Profile for need-based institutional aid.
I’ll let the experts provide guidance, especially as I’m not familiar with the current guidelines.
However, I had the same situation a couple years ago and reported on cash basis as that’s the basis used on our S corp return plus avoided the overstatement you mention. Be aware that some CSS schools require a copy of the business tax return in addition to the personal.
We were in a similar situation a few yrs ago and as I recall, the value of the S corp was not necessary for either FAFSA or CSS due to the small number of employees (3-5). We were/are 100% owners. I did need to send in both personal and corporate returns (maybe just for CSS - I forget). I don’t think owning the business hurt us but not really sure. We only got any aid once we had two kids in school at the same time as our EFC dropped below the total cost to send two to school full pay. Wish they were twins!
According to the new guidelines and starting this year, the small business asset exclusion will be eliminated from FAFSA. This will affect millions of small businesses owners and partners, which drive this economy. It does not matter if it is a family-owned business, has less than 100 employees, etc. It will be eliminated and everyone with a small business or a partnership owner, which is my case, 33% owner in a S-Corp, will have to estimate the net value of the business and report it on financial aid applications, including FAFSA. In the case of the S-Corp, all the profits or losses are passed through via K-1 to the owners to report on their individual taxes. The financial aid applications then take your W-2 and K-1 (S-Corp business profit/loss) into the AGI, and now on top of that, the small business owner or partner has to report the net value of the business that may not have real cash value as the profits are distributed at each year end, but intrinsic/accounting book value. With this new rule, the chances of financial aid in a State School is close to none for responsible small business owners that risk it all, create jobs, pay taxes and manage to make a small profit that is already counted in the AGI. Even qualification for Federal Loans may be at risk. I believe that they rushed this new guideline, putting another squeeze on the middle class, that pay taxes to subsidize the federal grants, but does not qualify for them and even a loan, having to pay out of pocket for the whole college ticket and not even qualifying for future loan forgiveness… Also, on top of that if you have more than one kid in school in the past your EFC was shared between the students in college, now you have to pay 100% for each student, doubling the family college payment responsibility. Ouch! ):
Are you sure about this? Right now, federal loans are available for anyone who is eligible to submit FAFSA (U.S. citizens and legal residents), regardless of family income and assets. Do the new Dept. of Education rules eliminate this universal availability of federal direct loans?
I believe the EFC accounting for multiple students (under the FSA and new SAI framework) has been pushed back to the 2024-25 year. There is a note about provisions in the FSA and FSATCA with an earlier effect date. So I could be wrong about when this change occurs. Either way would be too soon for me.
I hope I am wrong, but when you read about federal loans in the official studentaid government web site you will find:
Note: Forum does not allow web links. So do a search for loans in the site.
" Who can get Direct Subsidized Loans?
Direct Subsidized Loans are available to undergraduate students with financial need."
" How much can you borrow?
Your school determines the amount you can borrow, and the amount may not exceed your financial need."
With an inflated EFC, the college may decide that you have too much money and not offer much of subsidized loans, leaving you with unsubsidized loans which have worse terms. In my case in a very small S-Corp that provides services, the value of the company is on my experience and know-how, not in the temporary money that is in the bank to pay bills and employees. Therefore, the money that is in the bank on the day you file your FAFSA and CSS Profile, most likely will be the same money or a significant part of the money that will be accounted for in the AGI via K-1 at year’s end. Consequently, the EFC is being inflated and the money or part of it is being counted twice. Once from the balance sheet used to estimate the small business net value/worth and twice when the money is reported in your K-1 form. It feels like that the people that implemented these new rules, starting in 2023-2024, either have no clue about small business or rushed the decision, making college even more expensive for small business owners and the middle class, which pays a lot of taxes into the program/system, but does not qualify for its benefits. I hope I am wrong regarding the loans…
Yes, subsidized loans are available to those with demonstrated financial need based on FAFSA criteria. But unsubsidized federal direct loans are available to any student eligible to file FAFSA, regardless of financial need. Yes, having part of a loan subsidized is nice (and even for the most needy undergraduate students, $2,000 of the maximum annual loan amount is always unsubsidized), for me personally I don’t think it’s a game changer.
There isn’t great guidance on assessing business value because in the real world this is something the market determines, usually with input from experts using different methods. There’s no simple quickbooks report for this, and even your basis isn’t necessarily accurate for this.
For someone in your situation the usual approach is to ask what someone else would pay for this business or what you’d end up with if you liquidated in a hurry. I’d just arrive at a reasonable number and be able to document how you got there.
There are some disadvantages to filing for FA with an S corp. One of the few advantages is the ability to exclude employER contributions to pension programs, reported on the 1120S as an expense, from your income.
@AlexBravo some of the info in that post isn’t accurate. At this point, the new provisions for the FAFSA are not happening until the 2024-2025 academic year. AFAIK, eligibility for unsubsidized direct loans will not be changing.
We have a large piece of land that we own 48% of that is in a family LLC. We file a K-1. There is no business activity now, no income no employees. (30 years ago it was a hobby Christmas tree farm).
I am concerned with how to fill out FAFSA (but haven’t seen the questions), I don’t even know how to answer the question on the school net price calculator where they ask if you own a business, farm or other real estate. Is this technically a business? How do I know the value? Is the value what we could get if we sold the property? (I have no clue what that would be).
You can just use the assessed tax value unless you think that overstates the value.
You might want to check guidance for the family business exclusion for FAFSA:
This may or may not apply for the school’s form and/or css business profile. Schools are usually pretty aggressive about seeing all these types of assets, including your tax returns, before providing institutional need-based aid.
Llc and K-1 usually suggests a business. You don’t say whether you own all of an llc that has a 48% share of the property or you own 48% of an llc that owns the property. That might matter for the exclusion, at least as far as FAFSA is concerned.
Anon, this might be a good opportunity to evaluate whether there is any benefit to you in keeping the property. Assets are fungible- can you sell to one of the other owners? Liquidate the property entirely?
Not for the financial aid angle- although that should be considered. I’ve seen folks hang on to property, family businesses, etc. long past their “sell buy” date, either due to inertia (which is totally understandable), sentiment (which I also understand) or never having taken the time to figure out if the property is worth keeping or not…
So thinking through the new FAFSA rules might be a blessing in disguise if it forces you to do the calculations. I’ve got a neighbor who had partial ownership of property with cousins. None of them wanted it really and truly but it wasn’t costing much out of pocket (but insurance and taxes isn’t zero), and it sold for MUCH more than they had expected (recent zoning change). So the “great grandpa would roll over in his grave” attitude quickly became “what a windfall, thank you great grandpa!”.
Selling is not an option. My husband would never. His grandfather bought this land when he got back from WWII and he’s very attached to it. We own with his parents and they don’t want it, so they would not buy our half. It was put in the LLC initially, I think, to transfer shares to the four of us when his grandfather was still alive to avoid inheritance tax. My husband has no interest in the $. He has plans to turn it into a hunting retreat, air b and b type thing. and is looking into a family forest carbon credit program, that would at least cover taxes. We already have it in a conservation easement. It is quite a large amount of land and I’d rather have the $ .
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