Starting in the 2024-25 academic year, significant changes are being introduced in how financial aid applicants must report net income (or loss) from business or farm activities. Notably, the longstanding family farm and small business asset exclusion is being eliminated, altering the landscape of financial aid assessment and Special Circumstance Appeals. Here’s an overview of what these changes entail and how they might affect applicants and financial aid professionals conducting separate appeal reviews.
Key Change: Elimination of the Family Farm and Small Business Asset Exclusion
Previously, the family farm and small business asset exclusion allowed applicants to exclude the value of their small business or farm from their financial aid calculations. However, starting in the 2024-25 academic year, this exclusion is being removed. Families will now be required to report the net value of any business or farm they own unless they qualify for other asset reporting exemptions.
Implications for Special Circumstance Appeals
With the elimination of this exclusion, families who own businesses or farms may face a more detailed examination of their income during the financial aid process. Aid administrators may request additional documentation to verify the reported income, potentially through need analysis form supplements, profit and loss statements, or relevant income tax returns.
Relevant Income Tax Forms
To assess the net income from a business or farm, aid administrators may require various income tax forms, including but not limited to:
- Form 1040, Schedule 1: Additional income and adjustments to income
- Form 1040, Schedule C: Profit or loss from business (sole proprietorship)
- Form 1040, Schedule E: Supplemental income and loss from rental real estate, royalties, partnerships, S corporations, etc.
- Form 1040, Schedule F: Profit or loss from farming
- Form 1065: Return of partnership income
- Form 1120: Corporation income tax return
- Form 1120-S: Income tax return for an S corporation
These forms provide essential details about the business or farm’s financial health, including income sources, operating expenses, and asset values.
Detailed Examination by Aid Administrators
Aid administrators are encouraged to closely examine various financial aspects of the business or farm. This may include:
- Income Sources and Operating Expenses: Evaluating the general income relative to the business’s principal activity, operating expenses, and reported assets.
- Compensation of Family Members: Reviewing the compensation of officers and other family members employed by the business for consistency with the family’s reported income.
- Year-End Cash Position: Analyzing the business’s year-end cash position to determine if any significant cash should be considered as income rather than a business asset.
In cases where significant cash has accumulated, aid administrators might treat a portion of this cash as income for financial aid purposes, even if it remains as a business asset on the books.
Review of Business Deductions
The legitimacy of certain business deductions may also come under scrutiny, including:
- Vehicle, Travel, and Entertainment Expenses: These expenses may be questioned if they are perceived as excessive or not essential to business operations.
- Home-Based Business Deductions: Deductions related to rent, utilities, and other expenses for home-based businesses may be evaluated to ensure they align with the actual cost of running the business.
For farm operations, deductions are often more specific, yet aid administrators may still review labor costs and benefits programs if family members are employed on the farm.
Treatment of Business or Farm Losses
If a business or farm is not the primary source of family income, losses reported on income tax forms may be legitimate for tax purposes but may not always be considered when determining the Student Aid Index (SAI). Aid administrators have the discretion to assess whether such losses should be factored into financial aid calculations, particularly if they feel the losses do not accurately reflect the family’s financial capacity.
Overall, the elimination of the family farm and small business asset exclusion represents a major shift in financial aid assessment, particularly as it relates to the review of Special Circumstance Appeals. Applicants who own businesses or farms should be prepared for a more rigorous review process, with aid administrators examining income, expenses, and asset values in greater detail. By understanding these new regulations and gathering the necessary documentation, families can better navigate the financial aid process and ensure they receive appropriate consideration during Special Circumstance Appeals. If you are looking for assistance, guidance or support in completing these reviews, contact us at info@heag.us to connect with our team of expert advisors who are ready to lend a helping hand through this time of transition.