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Could your LLC Cost Your Child $100,000 in College Aid Eligibility?

by Norris Law Group on December 17, 2014

Many business owners use LLCs, S corporations, or partnerships as “pass-through” vehicles in order to avoid the “double taxation” of a C corporation. But Troy Onink, a contributor to Forbes magazine, warns that using one of these pass-through vehicles in order to avoid the taxes of a C Corp may result in a bigger bill for your child’s college education, which can average around $250,000 for top colleges in the United States.

Onink explains the situation this way: Colleges use the information provided on two forms to calculate a student’s eligibility for college financial aid. These forms are known as the FAFSA and the CSS. On these forms, a family’s net income is calculated at 46-47%, nine times more heavily than taxable assets, which are calculated at a 5 to 5.64% tax rate. Aid formulas take a family’s adjusted gross income (AGI), add in your retirement contributions (which are also counted as income), subtract allowances for federal, state and FICA taxes, and take a few other allowances. The resulting net income is your family’s expected contribution—up to 47% of your income each year—per child.

Onink says that the resulting yearly income can take away a child’s eligibility for up to $100,000 or more in financial aid over the course of four years, and clarifies that he is specifically talking about grants and scholarships at schools that have the largest endowments.

Families can run into trouble if one or both parents pass his or her income through a vehicle such as an LLC, S corp or partnership, due to their tax structures. Onink suggests that families concerned with college costs might want to consider a carefully structured C corp instead. A C corp may offer families in a similar situation two advantages:

  1. C corporations can control the flow of income instead of letting it all pass-through to your tax return, and ultimately to your child’s financial aid form. You can keep the net income in a C corp under $50,000 in order to keep it within the lowest tax bracket of 15%. You would also want to minimize the C corp’s “double taxation” as well (the taxing of net income from a C corp at the corporate level and then again upon distribution to shareholders).
  2. In a C corp, retirement contributions made by the employer are not counted as income on the aid forms. Under a C corp, you might also be able to make retirement contributions that are two or three times the size of the contributions you can make through a pass-through vehicle. This could help your child qualify for more financial aid and allow you to make larger retirement contributions as well.

An experienced tax specialist can help you determine what kind of corporation may help you meet your personal financial goals and help your child remain eligible for the largest amount of financial aid possible. A skilled business law attorney can then help you set up the proper structure for your business entity.

Attorney Graham Norris and his associates at the Norris Law Group serve the residents of Utah County, UT and throughout Utah, Wyoming, Idaho, and California. Contact them today at 801-932-1238 or online for a free consultation.

 

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