Thursday, July 28, 2022

Can My S Corp Pay My Student Loan

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Refinancing Can Sometimes Save You Even More

Should I Pay My In-Laws Back For My Student Loans?

Student loan refinancing can potentially provide borrowers with a lower interest rate, better repayment terms and higher quality service. Combine it with repayment assistance from your employer, and you could come out on top financially.

Just remember, once you refinance federal loans, you permanently lose access to federal aid programs, such as income-driven repayment plans and Public Service Loan Forgiveness.

Student Loan Debt: Tax And Other Considerations

Prior to the COVID-19 pandemic, the competition to attract and retain talent was fierce. While national unemployment has surged, in certain industries the shortage of qualified workers remains.1 According to a recent survey by the organization American Student Assistance, one benefit employees find desirable is assistance with paying off their student loan debt.2

Student loan repayment assistance, which started as a niche offering by a few companies, is becoming a more common workplace benefit. Since 2018, the number of employers offering student loan assistance has doubled, and these employer-offered programs are expected to continue growing despite a stagnant economy,3 in part because of tax benefits introduced by the Coronavirus Aid, Relief, and Economic Security Act.4

This article examines the student loan burden in the United States, reviews programs designed to assist borrowers with repayment, and discusses the tax issues associated with student loan repayment assistance programs and debt forgiveness. Although tax implications are the primary focus of this article, alternative ways of repaying student loans are also discussed.

Consequences of student loan debt

CARES Act provisions

Employer programs that assist with student loans

Abbott

KPMG

Repayment of student loan assistance

Discharge of student debt

Debt discharge for entering certain professions

Debt forgiven where college ceased operations

The insolvency exception

Permanent and total disability

Footnotes

How Employer Student Loan Assistance Works

Approximately 8% of employers currently offer student loan payment benefit, which has doubled from 4% in 2018, according to Society for Human Resource Management.

With outstanding U.S. student debt growing daily and totaling roughly $1.7 trillion, companies offer loan repayment assistance to attract and retain college-educated employers.

It is clear that we have reached a tipping point and student loans are having secondary impacts on many professionals, says a spokesperson for accounting firm PwC.

PwC has paid more than $37 million toward student loan debt as a result of their program, one of the first of its kind. The benefit pays $1,200 a year for up to six years to help associates and senior associates pay down their student loans.

Estée Lauder has nearly 1,000 full-time employees registered for its student loan assistance program. The company contributes $100 towards eligible employees student loans every month, with a $10,000 lifetime maximum contribution, according to a spokesperson for the company.

Chegg, Fidelity Investments, Penguin Random House and Hulu are some of other companies that offer this benefit.

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White House Drops Free Community College From Its Spending Bill

“Why should taxpayers 70% of whom didn’t go to college pay back loans for people who have an obligation they haven’t fulfilled?” Foxx asks.

Foxx thinks this popularity question is a big reason behind Biden’s hesitancy to act.

“I do think the president maybe understands that broad loan forgiveness is not popular in this country, which is why, I think, he has not gone the route of doing what some in his party want to do.”

But polling suggests broad loan forgiveness would be popular, if done with some nuance. For example, a Grinnell College poll conducted in March found that 27% of respondents supported forgiving all student debt and an additional 39% supported forgiveness “for those in need.” In other polling from Vox/Data for Progress and the Harris Poll a majority of respondents supported broad, if limited, forgiveness.

Instead of acting unilaterally, though, this year Biden asked the Education and Justice departments to explore his legal options. The results are still TBD, more than six months later.

Since then, the White House has gone largely quiet on loan cancellation. Some advocates and many Democrats worry that, for whatever reason, the administration is intentionally dragging its feet. Not so, said Kvaal, the education undersecretary, in his interview with NPR.

Why I Like Credit Card Debt In A Small S Corporation

Should I Consolidate My Student Loans?

The tax advantages of organizing as an S corporation or an LLC electing to be treated as an S corporation are significant. Self-employment taxes disappear with the corporate structure and with an S corporation there is no income tax either as all profit flows to the owners. As with all good things, there are pitfalls. The S corporation is no different.

Most small businesses in my office use the S corporation structure. There are a few rules that need to be followed, like the owners paying themselves a reasonable wage. The wage issue is easy to handle I require S corporation clients to do their payroll in my office. Problem solved.

The other major issue with S corporations is basis. Before your eyes roll back in your head, hear me out. Basis is one of those animals many accountants screw up on or fail to track accurately. You need to have a fundamental understanding of basis if you are business owner. If your accountant messes it up the IRS still sends you the bill, not the accountant.

What is Basis?

Before we manage basis we need to know what it is. In this instance we are not talking about basis in a single asset. Our discussion focuses on your basis in your business. Basis in this instance is:

Initial investment

Distributions

Losses.

It gets a bit more complicated, but we are a family blog so we will not talk dirty. There are two types of basis you need to understand in an S corporation: stock basis and debt basis.

Problems with S Corporations

Parting Shot

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Tax Consequences Of An Employer Paying Your Student Loans

Ordinarily, any student loan repayment assistance you receive from your employer is taxable.

There was an exception for 2020 which allowed borrowers to deduct up to $5,250 from any employer-paid student loan assistance as part of pandemic relief.

But while repayment assistance might come with taxes, you can still get a tax break on any tuition reimbursement you receive. If your employer helps you pay for classes, you can claim a tax deduction for up to $5,250 annually.

How The Cares Act Impacts Employer Student Loan Assistance Programs

With the new Coronavirus Aid, Relief, and Economic Security Act , a temporary tax-free provision is provided for employer student loan assistance programs.

Section 2206 of the CARES Act allows a portion of student loan payments to be excluded from income. Whether those payments are made directly to the employee or the lender, they will be tax-free. The income exclusion is up to $5,250 per year per employee.

This new provision benefits both the employee and employer. The employee gets to avoid paying income tax on the student loan payments, while the employer gets a payroll tax exclusion.

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Helping Employees Pay Their Student Loans

Traditionally, an employers student loan contributions are subject to payroll taxes and are taxable income to the employee. The CARES Act modifies this tax treatment for payments made after March 27, 2020, and on or before Dec. 31, 2020. During this time span, employees can receive up to $5,250 to pay their student debt and exclude it from gross income .

Essentially, the CARES Act expands the scope of Sec. 127, which addresses employer-paid tuition benefits, to cover student loan payments. The $5,250 that employees are permitted to receive tax-free for their education under Sec. 127 can also be used in 2020 for student loan repayment. The funds must be applied to the employees own student debt, not the debt of the employees spouse or dependents.

Specifically, the act amends Sec. 127s definition of educational assistance that can be received tax-free from an employer to include:

in the case of payments made before January 1, 2021, the payment by an employer, whether paid to the employee or to a lender, of principal or interest on any qualified education loan ) incurred by the employee for education of the employee.

Can My Llc Lend Money To Another Llc

Should I Keep Letting The Government Pay Off My Student Loan?
  • Posted on Oct 13

The answers to these questions depend on a few factors. The ideal scenario is that both LLCs are single-member entities, making lending and borrowing transactions more simple. If there are multiple members in each LLC, you would have to look at your operating agreements to determine the procedures regarding lending and borrowing money, as the transaction may require a majority vote or consensus of all members. If this issue is not addressed in your operating agreement, the default provision can be found in the Florida Revised Limited Liability Company Act. Once you work through that issue, it is key to have some agreement between the two LLCs, such as a promissory note. A promissory note is a written promise to pay someone under the specified terms. This formalizes the loan, making it a legal record and ensures repayment later on. Some terms that should be included are names and addresses of the borrower and lender, amount of the loan, collateral , interest rate, and repayment structure. It is crucial that both parties sign the note to make it enforceable. Recording a loan in your books uses several financial accounts to record the loan, including cash, loan receivable and interest revenue. You should consult an experienced accountant to properly account this loan in your records.

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Tax Rates And Potential Savings Depend On Your Finances

Minimizing the tax hit will depend on several factors, like the interest rate and terms of your student loans, your salary and the structure of your employers student loan assistance program. Crunch some numbers to see if youll come out ahead of the tax liabilities by receiving student loan benefits from your employer.

How To Take Money Out Of An S Corporation

New S Corporation business owners often ask me how to get money out of their business account and into their personal banking account.

Basically, there are four different ways to take money out of an S Corporation. In todays post, Ill outline how to get money out of an S Corp and what you should avoid during these transactions.

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Can Small Business Owners Pay Student Loans Tax

I have to admit, when I heard about this program, I got really excited.

Imagine if youre a dentist and you own your own practice. Couldnt you call your CPA and ask them to have your business issue you a check for $5,250 that you could then use on your student loans?

Heres the major problem with this employer student loan repayment benefit: you cant do that.

Section 127 of the IRS code says that educational assistance programs cannot give owners of a business more than 5% of the benefit.

You also cannot give favorable treatment to highly compensated employees making more than $125,000 a year.

You also have to announce the rules to your employees of who would be eligible.

That seems pretty simple. You could just say that after one year of service, an employee is eligible for student loan repayment assistance up to 5% of their salary, at a maximum of $5,250.

The problem though is with the rules as they exist, you cannot pay your loans tax-free as a small business owner unless you had a massive number of employees.

Basics Of An S Corporation Loan

Pay Your Student Loans Off Faster by Sending All Your ...

Sometimes an S corporation is short on funds and needs a fast cash infusion. A loan from a bank may not be a viable option, but a shareholder can choose to fund the business out of their own pocket. The benefit of making a loan comes in the form of getting the money repaid without the need to disburse money to other shareholders. However, repayment of the loan has to be handled carefully as it can cause the shareholder to be responsible for taxes on that income.

The S corporation has the option to pass through losses to the owners. This can be deducted by shareholders to the total amount of their adjusted stock and loan basis. In the event the pass through is more than the shareholderâs stock basis, the excess amount of the loss reduces that shareholderâs loan basis, but it canât be lowered below zero.

Hereâs a potential scenario: an S corporation needs an influx of capital, but the shareholders were too busy to obtain a loan and a critical payment is upcoming. One of the shareholders gives the S corporation a personal loan on the expectation that the corporation will get a loan in the near future and repay the shareholder within a short period of time. Because there is no bank note, the loan is considered to be an open account debt. In the event the corporation passes through net income in a following year, the loan basis is increased, but only to the amount that the company owes the shareholder at the beginning of the tax year.

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Employer Student Loan Programs Do Not Require Payment To Your Servicer

One of the most frustrating past components of employer student loan repayment programs was paternalism.

What I mean is many employers would require that the money go directly to the loan servicer instead of the employee.

Thats fine if you are paying back your loan, but if you are repaying under an IDR type plan, that can actually get you little to no benefit.

In one example, a PSLF-eligible physician planned to have her loans forgiven completely after 10 years of service, tax-free.

The hospital where she worked insisted on paying $25,000 a year to her loan servicer, which was totally wasted because, at the time, the servicer would not apply these prepayments to what she owed.

To make matters worse, the benefit was considered taxable income as well. That means the employee had to pay income tax of over $10,000 a year for a benefit that netted her nothing, and the employer was out $25,000, too.

This new law incentivizes employers to trust their employees. The money can go directly to the employee or the lender, it doesnt matter as long as the employee made equivalent payments on student loans.

If the employee were not to use that money to pay loans, then the money would just be taxable income to the employee without consequences for the employer.

I hope more student loan repayment programs in the future give employees the money and let them worry about using it for the loans to get the tax benefit.

You Can Hire A Financial Planner To Help Your Grandchild With Planning For College

Pros:

  • You can rest easy knowing that your family is getting professional advice.
  • In addition to helping find the right investment vehicle for your gift, a financial planner can also help with finding scholarships, school and major selection and how to maximize your grandchilds financial aid eligibility.
  • The family will be able to align their college savings with their retirement and other household investments.

Cons:

  • Some financial advisors can only offer investment products that are available through their broker-dealer firm.
  • There will be higher fees and expenses associated with an advisor-sold 529 plan.
  • You may not be involved in the decision-making process.

See also:

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Can You Lend Money To Your Own Llc Business

A new, small business is rarely profitable overnight. An owner might have to use personal money to nurture a new limited liability company . When the owner or owners, also called members, invest personal funds in the LLC, the infusion of cash constitutes equity or debt that the LLC must repay. If youâre thinking of lending money to your own LLC, there are some important factors to consider.

Do You Have To Pay Back Sba Loans

Should I Stop Paying My Student Loans Right Now?

The Small Business Administration offers several types of business loans. In most cases, you will have to pay them back. The good news is they usually come with long repayment terms of up to 10 years. Also, if you fail to repay an SBA loan, the lender may recover 50 to 85% of the outstanding balance from the SBA.

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You Can Contribute To A 529 Plan Owned By Your Grandchilds Parent

Pros:

  • Your gift can grow substantially over time with tax-free earnings and tax-free withdrawals when the funds are used to pay for college.
  • There will be no effect on your grandchilds FAFSA when the parent withdraws funds to pay for college.
  • You can still take advantage of the favorable gift-tax treatment on your contributions.

Cons:

  • Assets held in a student- or parent-owned 529 account will be counted as a parental asset on the FAFSA, and can reduce aid eligibility by a maximum of 5.64% of the account value.
  • You will not have control of the funds since the account will be in the parents name.
  • You may or may not be able to claim a state tax credit or deduction on your contributions.

Contribute To A Coverdell Education Savings Account

Pros:

  • Earnings in the account will grow tax-free and will not be taxed at withdrawal when they are used to pay for qualified college expenses.
  • Coverdell ESAs allow you to self-direct your investments.

Cons:

  • You can only contribute up to $2,000 per grandchild per year.
  • The childs parent or guardian must be responsible for the account.
  • In order to use a Coverdell ESA, the child must be younger than 18 years old and the parents income must be below certain limits.

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