Your business income and business equity are treated differently by Federal Methodology (FM) and Institutional Methodology (IM).
As a general rule, schools that use IM to determine your eligibility for institutional need-based grant will carefully review your business tax returns, schedules and K1’s and often make adjustments to your reported income and asset values.
Below is a description of how your business will be treated for both FM & IM.
- If your family owns more than 50% of the voting control of a business AND the business has less than 100 full-time equivalent employees – its value is defined as $0. (See right hand margin for who is a family member for calculating your ownership percentage.)
- If your family owns 50% or less of the voting control – the value of your share of the assets must be included at its current fair market value.
- If your business has more than 100 full-time equivalent employees – the value of your share of the assets must be included at their current fair market value.
- The first $625,000 of your business assets are treated in a preferential manor in both FM and IM.
The preferential treatment of the value of qualifying family owned businesses extends to farms and rental real estate held in the name of a formally recognized business entity such as an LLC, a Partnership, a Subchapter S Corporation or a C Corporation. This represents a major benefit for most business owners and can result in the exclusion of hundreds-of-thousands or millions of dollars of business assets.
Business & Rental Property Income:
No adjustments to reported income on your tax return.
Rental property is considered an investment, not a business in Federal Methodology. Therefore, 100% of your net rental profit/loss and the net value of the property are included in the financial aid formula.
- Report the value of your share of ALL businesses owned by your family.
- The first $625,000 of business assets are treated in a preferential manor.
Some schools that require the CSS PROFILE, and award substantial school based grants and scholarships, make adjustments to the income reported on your tax returns. These adjustments typically increase your business income and decrease the amount of grants or scholarships you are eligible to receive. Some of the common adjustments are shown below:
Add to your reported income:
- All business & farm losses.
- All rental/royalty losses.
- Therefore, your business losses are not subtracted from your other income as they are on your federal tax return.
Schedule C adjustments:
- Add your car and truck expense deduction to your income.
- Add your depreciation expense deduction to your income.
- Add your depletion expense deduction to your income.
- Add your travel expense deduction to your income.
- Add your office in the home deduction to your income.
- Add any other business expenses that seem large or unusual to your income – (subjectively applied)
Partnerships, Limited Liability Companies and S-Corp adjustments:
- Add ALL reported losses to your income.
- Add your share of regular depreciation claimed on the business tax returns above to your income.
- Add your share of car and truck expenses claimed on the business tax returns above to your income.
- Add all §179 bonus depreciation shown on your schedule E to your income.
Rental property is considered an investment, not a business, in Institutional Methodology. Therefore, 100% of the net value of your rental property (Estimated Selling Price – Mortgages) is included as a family asset.
Schedule E adjustments to Rental Property:
- Add all depreciation expense deductions to income
- Add “excessive” travel expenses to income (subjectively applied)
- Add any other unusual expenses to income – (subjectively applied)