<p>Hello,
I am considering entering into a small business as a part owner of a LLC where I would also work. Currently I am ‘just’ an employee, so have a normal W-2 income statement. I fully understand FAFSA in this regard. </p>
<p>The business would be set up as a LLC electing to have 'S-Corporation tax status". Part of what this means is I would be receiving a ‘paycheck’ as an employee of the company, as would the other people involved. The business would have a ‘negative net worth’ at least for the first few years as the loans against it would be more than what its assets could be sold for - operating money essentially. </p>
<p>I see in the EFC is looks like small businesses (there will be a max of 5-7 people involved) are ‘exempt’ from the general figures. Both my kids go to FAFSA only State Schools. </p>
<p>I am specifically wondering about the Simplified Needs Test and possibly the Automatic Zero EFC and how this would affect them. I do not expect to make much income (<30K) for the first couple of years and am wondering if our family would still be eligible for these programs, compared to when we just received W-2s. My understanding is that I would not show any ‘business income’, only ‘wages’, as all profits are typically passed through to, and taxed, at each LLC members personal rate.</p>
<p>I guess a summary question is there anything in setting up this LLC that would make either of these programs ‘off limits’ to us, or would they be no matter what, since I will be involved in a business? </p>
<p>I believe you would have to fill out a schedule E and possibly a schedule SE for self employment taxes (depending how the wage is paid), which means you would be required to do a long form 1040 and would not be eligible to complete a 1040a or ez. This would make you ineligible for the auto 0 or simplified needs (unless you meet one of the other criteria - means tested benefits etc).</p>
<p>Check with your accountant, but I believe S corps have to issue K-1 forms to all shareholders. This gives each shareholder their prorated share of the profit or loss for the year. The income on the K-1 is then reported on the individual’s Schedule E as part of the1040 long form.</p>
<p>This is the way my accountant does it. If there is another way I’d love to hear about it.</p>
<p>Thanks for the replies. I have an appointment with my Tax Man on Monday also. One other question on this same topic. More of a general FAFSA issue than to Means Test and Zero EFC Test.</p>
<p>I also have the option of NOT being a part owner, but still working for this new business. One thing in particular I am wondering is IF I am a part owner, when FAFSA asks for “Amount of Other Assets” (or however it is worded) do I also need to include the amount in the checking accounts of the business? I am ‘guessing’ not, since the ‘value’ of small businesses seems to be disregarded, but am not sure. In our type of business, it is relatively low margin sales, but large dollar volumes - meaning depending on payables and receiveables, the checking balance can be several times what my wages are for a year. </p>
<p>IF it is counted, it might make me think about not buying into it until after my kids are done with college.</p>
<p>Assets of the corporation (i.e. checking accounts, real estate etc) do not have to be reported on FAFSA. However, you have to be very careful of not intermingling your personal money and the corporate money – no using corporate funds to pay your personal bills – or you will have a problem with the IRS. </p>
<p>By the way, all bets are off if you have to file the CSS Profile form, which does look at the value of businesses. Some schools will have you fill out a Business and Farm Supplement which goes into detail looking at assets etc of the corporation.</p>