Here’s an advantage to being in business for yourself: create a tax-favored educational assistance program.

Hire your child age 21 or older. Grant the education program to all your employees, including your employee-child.

Now, you may deduct up to $5,250 of your employee-child’s college tuition and book fees. The $5,250 is the annual, per-employee limit on Section 127 educational assistance.[1]

To create the benefit, you need a plan. Good planning can make this benefit well worth the effort.

To put the plan in place, your child must be

The Age-21-or-Older Rule
The age-21-or-older rule is buried in the “attribution” rules that apply to this educational assistance plan. Under the attribution rules, children under the age of 21 are deemed to own the same percentage of the business as do their parents.[2]

This rule is important. The law does not allow a Section 127 education plan to pay more than 5 percent of the educational benefits during the year to individuals who own more than 5 percent of the business.[3]

Question. You own 100 percent of your business. Can you give your 20-year-old daughter tax-free benefits from the educational assistance plan?

Answer. No. If your daughter is age 20, she “owns” 100 percent of the business for purposes of the Section 127 educational assistance plan. Thus, the benefits would not be tax-free.

That’s bad. This is worse: Giving Section 127 educational benefits to your 20-year-old daughter, a 100 percent shareholder, destroys the plan for everyone. Thus, giving illegal benefits to your daughter makes taxable all the educational benefits to all employees who participate.[4]

Question. You have a 21-year-old son who is working in the business. Can you offer him tax-free educational benefits? Or, If my employee is my grandchild who is under the age of 21, can he or she receive full educational benefits under the Section 127 plan?

Answer. Yes and yes! However, there may be restrictions.

If you don’t currently have an educational assistance program in place, contact us at , and I’ll help you get an audit-proof plan in place.

[1] IRC Section 127(a)(2)

[2] IRC Section 127(c)(4), 1563(e)

[3] IRC Section 127(b)(3) and Reg. Section 1.127-2(f)(2)(iii)

[4] IRC Section Reg. Section 1.127-1(c)

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If you select a pay-in-full option for any of the tiers above, you have a 60 day refund policy, no questions asked. Note: if you receive a refund, we cannot  issue a certificate for credits.

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Rest-assured, we trust you’ll have a fun, informative, and positive experience in The Executive Touch.

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