How to Deduct $5,250 of Your Adult Child’s College Tuition as a Business Expense (Yes, You Read That Correctly!)
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By Jamie Moore Marcario, Managing Attorney

With today’s tuition costs at astronomically high levels, paying for a child’s college education can feel like extortion. If your child is an adult, you may have decided that it’s up to him or her to pay for tuition. But if you DO  want to help your adult child (or grandchild) with college tuition, there are some ways to do it—at least part of it—TAX FREE!

One method is to hire your child as an employee and set up a Qualified Educational Assistance Plan, which allows employers to provide up to $5,250 per year, per employee, in tax-exempt tuition benefits.

Under Section 127 of the federal tax code, employers can offer this tuition assistance to employees (who don’t have to report it as income) and then deduct the cost of the benefit as a business expense on their company’s taxes. What’s more, the assistance includes any form of instruction or training that improves or develops the capabilities of an employee, not just job-related or degree programs.

Seems like a win-win, right? It definitely is, as long as certain requirements are met. First, the money CAN be used for tuition, fees, books, equipment, and supplies, but it CANNOT go toward meals, lodging, or transportation costs. And the equipment and supplies (other than textbooks) aren’t eligible if the employee gets to keep them at the end of the course.

Beyond those stipulations, an adult child is eligible if he or she:

  1. is age 21 or older,
  2. a legitimate employee of the business,
  3. doesn’t own more than 5% of the company, and
  4. is not a dependent of the parent/business owner.

Additionally, the tuition reimbursement plan must be written up as a benefit available to all employees, and employees must be given reasonable notification of the availability and terms of the program. Moreover, no other benefits can be offered as an alternative—the employer cannot provide additional pay or other bonus options for employees who don’t use the educational reimbursement.

Outside of funding your adult child’s schooling, an educational assistance plan may also be an attractive benefit that can be used to recruit top talent to your team and help retain your current employees.

For help setting up tuition reimbursement for your employees—whether they’re your children, grandchildren, or non-relatives—and to make sure you’ve structured the employment of your children or grandchildren properly to maximize tax benefits, contact the legal team at Thrive LawTM. We’ll walk you through the legal, financial, and tax issues related to the Section 127 plan and discuss other business strategies that can be used to defray education costs and save on taxes.

This article is an educational service of Thrive LawTM, a business law boutique. It does not constitute legal advice or imply an attorney client relationship. We offer a full spectrum of legal services for businesses and are equipped to help you make the wisest choices about your business dealings while you’re alive and well or in preparation for the event of your incapacity or death. We also offer a Healthy Business & Creative Checkup for ongoing ventures, as well as outsourced general counsel plans for businesses who need a legal team on speed dial. Contact us today to schedule: 727.300.1990 or hello@thrivelaw.com. We cannot wait to meet you!

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