Monday Morning Quarter-Buck
By Financial Planner Kate Welker, CFP®
Hornell, New York
Graduation season is upon us! I’ve been filling up my calendar with graduation parties and seeing the social media posts showing the first day of kindergarten next to the last day of senior year. If you have a child entering high school or nearing graduation your mind is likely full of thoughts about their future, college plans, workforce plans, proper high school coursework, the right extracurricular activities, and if college is in their future how to finance it. One of the big steps in the college process is filling out the Free Application for Student Aid (FAFSA) form and working that to your advantage. There are many opportunities for planning around this that a financial planner can help you work through, I’d like to focus on opportunities for small business owners.
Being a small business owner comes with many challenges, but it also allows for some nice flexibility in your business decisions and how they will affect your income in the college planning years. Ideally, you will begin thinking over strategy when your child is starting high school, but even if they are a senior you can make changes now to help in future years. Keep in mind that each school year will base aid off of the tax return from 2 years prior. For example the 2019-2020 school year aid will be based on the 2017 tax return. Moves made in 2019 will affect the FAFSA for the 2021-2022 school year. If your student will be in 11th grade this fall, this tax year is the first that will be looked at when determining financial aid.
As a business owner one of the big numbers you should be looking at each year is the net income on your tax return. This is also the number that will be reported on the FAFSA. Following are some strategies to consider to help make that number lower, or choose to make it higher in certain years.
A major perk of being a small business owner is that you do not need to report the value of your business or farm. There are requirements to be able to meet this exclusion including being family owned and having less than 100 employees. Finaid has a nice summary of the requirements at http://www.finaid.org/fafsa/smallbusiness.phtml.
This includes the overall value of your business and the assets held by the business. The year a new asset, such as a piece of equipment, is placed into service you have the ability to accelerate the depreciation and claim a Section 179 deduction. This will allow you to write off more of the asset and lower your income. This does leave you less to expense the following year and can lead to capital gains down the road when you sell that equipment, but if planned out properly this can work to your advantage with financial aid.
When you are the boss you can choose when to work, you can also determine how and when you are paid. If you are looking at accepting a job that will bring in significant revenue, you will want to take some time to determine if you should accept the job at the moment, or if pushing it back until January would be beneficial.
For example, In December a contractor wins a bid for a job with a large profit margin and the client wants to pay the down payment. If the client is willing to wait until January to start the agreement (if they are a business they may also want their tax deduction so you will need to be aware of that) you can shift that income into the next tax year. You will have that income to deal with the following year, but you have more time to plan on ways to offset that.
High and Low Year Cycles
Another concept to think about is choosing to have a low income year followed by a high income year. If you know that your income levels will make it difficult to consistently keep your income low enough to qualify for aid you can strategize to lump income and deductions in a way that would benefit you in certain years.
Say you had a really good year and know that you will not be qualifying for aid that year. Maximize your income that year; try to bring in funds that are pending, close contracts before the end of the year, and hold off on large purchases. The next year you would focus on maximizing your expenses and achieving a lower income.
That is just a high level look at some complex strategies. There are tax and accounting laws that need to be worked within and tax implications to consider as well. If you are a business owner and you see ways in your business to make this work I encourage you to reach out to a professional to help you walk through the plan for you.