Small Business Owners Can Deduct Children's College By Implementing an Educational Assistance Program
Many of you know I have two children in college. One is completing his master's degree and the youngest is completing her Bachelor's degree. Both are doing well in school and I am very proud of them.
I am fortunate in that my children both received lot's of scholarships to get them through their undergraduate programs. They saved dear old Dad a lot of money. But not everyone is as fortunate to receive scholarships. So what are some of the ways of getting your children through school and being able to deduct it?
If you own a small business you can deduct part of your kid's college tuition as a business expense with an IRS Section 127 plan. Basically, if you are a small business owner you can reimburse your child-employee up to $5,250 a year for tuition and books then deduct that amount. But, as with any deduction - there are rules...
First, You Have to Put a Plan in Place...
Create an Educational Assistance Program and make available to all employees. This program must benefit employees generally and not discriminate in favor of highly compensated employees or your child-employee. The program will only reimburse for tuition and books. Meals, lodging, transportation will not qualify for reimbursement.
Now the rules for your Child-Employee...
First off, your child must be a legitimate employee of your business. To prove this keep records, such as time sheets or documentation that your child did the work. Good thing is that law does not require a certain number of work hours before qualifying for your educational assistance program.
Your child-employee must also be 21 years or older. This is because children under the age of 21 are considered to own the same percentage of your business as you do. I think we would all disagree with this statement!!! The law does not allow a Section 127 education plan to pay benefits to individuals who own more than 5% of the business and your child under 21 is considered to own your interest in your business. Your child-employee also must not be a dependent on your tax return.
Added Benefits to Providing an Education Assistance Program...
Not only will a program like this help you get your kids through school it could also increase employee loyalty. Most large corporations provide a program like this to employees - so offering this helps to compete with big business when recruiting high level quality employees.
Not Ready to Implement an Education Assistance Program?
Not to worry, there are additional tax strategies to help get your children through school. Some will require a little more planning and time, but will all pay off in the end. We will discuss some of these strategies in future newsletters.
As always, if you have any questions about this tax strategy or any others, don't hesitate to give us a call!