How to Deduct $5,250 From Your Adult Child’s College Tuition as a Business Expense
With the cost of today’s tuition, paying for a child’s college education can feel like extortion. If your child is an adult, you may have decided that it is up to them to pay for tuition, but if you do want to help them with tuition, there is a way to do that tax-free.
One method is to hire your child as an employee and set up a Qualified Educational Assistance Plan. This allows employers to provide up to $5,250 per year, per employee, in tax-exempt tuition benefits.
Section 127 of the federal tax code says that employers can offer this tuition assistance to employees and then deduct the cost of the benefits as an expense of the business, putting it on the 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 simply job-related or degree programs.
Seems like a win-win situation doesn’t it? 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 towards meals, lodging, or transportation costs. If the equipment and supplies aren’t eligible if the employee can keep them when the course is over.
Beyond these stipulations, an adult child is eligible if he or she:
- is 21 or older,
- a legitimate employee of the business,
- does not own more than 5% of the company, and
- is not a dependent of the parent/business owner.
In addition, the tuition reimbursement plan must be established as a benefit available to all employees, and employees must be given reasonable notice 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 Access 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.