Coping with soaring college costs remain one of the most pressing financial problems facing parents. And that’s as true for parents who own businesses as it is for others. Fortunately, you may be able to tap funds in your corporation to alleviate the financial crunch.
There are a number of ways your corporation can help. But from a tax standpoint, some offer more advantages than others. For instance:
- If you borrow money from your corporation to meet college bills, there could be unexpected tax consequences. For example, if no interest is charged on the loan, you could end up with phantom taxable income.
- If your child owns stock in your corporationor you make a gift of stock to your childthe stock can be sold back to the corporation to pay for college. There will likely be a capital gains tax on the sale, but your child’s tax will be lower than if you sold your own stock back to the corporation.
- You may want to have your corporation make a contribution to a Coverdell education savings account. This is like an IRA for college savingscontributions grow and compound tax-free and there is no tax on withdrawals if used to pay college expenses.
- If your corporation’s retirement plan doesn’t permit plan members to borrow from their accounts, you may want to amend the plan to permit borrowings. Within limits, you can get a loan from your account for college costs.
- If your child helps in the business, you may want to make him or her a formal employee. This allows your corporation to pay tax-deductible wages to your child which can be used to pay college expenses.
To discuss such tax-savvy ways to save and pay for college costs, please contact us.