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How to Deduct $5,250 of Your Adult Child's College Tuition as a Business Expense

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 is a way to do that—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 off, the money can be used for tuition, fees, books, equipment, and supplies, but it can’t 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 hiring your children or grandchildren properly to maximize tax benefits, contact us as your Family Business Lawyer™. 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 a service of Sky Unlimited Legal Advisory PC, Family Business Lawyer™.  We offer a complete spectrum of legal services for businesses and can help you make the wisest choices on how to deal with your business throughout life and in the event of your death.  We also offer a LIFT Start-Up Session™ or a LIFT Audit for an ongoing business, which includes a review of all the legal, insurance, financial, and tax systems you need for your business.  Call us today at (650) 761-0992 to schedule.

 

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