Can private school be a business expense?

Question

Hey all, the more I learn the more I realize I know nothing! On my 3rd flip thanks to the help of this site. So, thank you for any reply!

My daughter is now attending private school - 7th grade, and to my knowledge, in the state of Missouri, private school is not a deductible expense.

Is there a way that my LLC can pay the tuition and it be a business expense? I know I've heard some about this before but I haven't begun to unpack or dig into it yet.

Any help, tips, concerns are greatly appreciated!

Natalie Kolodij · Answer

Nope. Definitely not.

You can pay your daughter to do some work for you as an employee though- That's a legitimate strategy. So essentially she is paying for her own private school out of income that she received taxed at a (presumably) lower tax rate than that of mom and dad

Linda Weygant · Answer

Increase that $6300 to 11,800, then have your daughter contribute $5500 to an IRA and you've effectively taken that amount tax free as a business deduction and started your kid a nice retirement plan as well.

You pay 15.3% FICA in exchange for a higher tax bracket saving, and it could be some decent savings.

There are limits to this, but I'm on my phone and can't look them up.

Linda Weygant · Answer

I had a client once whose son was in "Private School".  However, the more we discussed this, I found out that the "school" was technically a school, but was also a rehabilitation facility for drug and alcohol abuse.  Part of the son's tuition at the "private boarding school" was directly related to drug and alcohol counseling, counseling for clean and sober living, etc.

Essentially, it was a treatment facility that also kept the kids focused on their schoolwork and provided teaching and tutoring.

I asked to see one of the tuition bills and, right there on the bill were a bunch of treatment codes for medical services.  There were then also "Room and Board" and "tuition" and "books and supplies".  We were able to claim the vast majority of what they were paying as medical expenses on his Schedule A (subject to the 7.5% floor (at the time)), but it ended up being a huge deduction for them regardless.

I also encouraged them to submit the bills to their insurance company, but this was in the Bad Ol Days prior to the ACA and the kid had already reached lifetime maximums for other treatment he'd had in the past.

Here's hoping the OP is not in the same situation, as the tax deduction is not worth the heartache and emotional toll all of this took on the family.  But if for some reason the Private School is really a medical facility, there ya go.

Dave Toelkes · Answer

@Natalie Kolodij,

You suggest hiring the daughter to work for the business then having the daughter use her income to pay her private school tuition.  Does not matter that the daughter would use her income to pay a bit of the private school tuition, Paul is still paying the full tuition amount regardless of whether the source of the funds are the business or his personal after tax income.

If what Paul pays the daughter is a fair and reasonable wage typically paid for the work the daughter actually does, I don't see that the little amount he might pay a 13-year old would make any significant dent in his tax liability.

Am I missing something?

Christopher Smith · Answer

On what possible basis? Not sure how that could possibly qualify as an ordinary and necessary expenses to conduct your business.

Seems like an inherently basic personal expense for the support of your dependent child. You get to claim an exemption on your Federal tax return for that.

Jesse Goldberg · Answer

There are some interesting things I've seen done, but as a general rule I only write off things I can plainly claim "This benefits how I conduct business or adds value to my business". If it was your education that is relevant to your LLC, I would say unequivocally yes (depending on your state), but I don't think writing off family expenses for your business would be wise. That being said, I'd definitely talk to your CPA if you have one and ask...mine has definitely been the guy to say, "Really? Disney World? No.".

Best of luck and congrats on your 3rd flip!!

Scott L. · Answer

No...don't do it. Great way to get the IRS on you. Private school tuition is not federally deductible. There are some small exceptions for employers sending their employees to training related to their job, but that's not the situation you describe.

Paul Allen · Answer

If you're a sole proprietor or partnership (where both partners are the parents) you don't pay payroll taxes on your children under age 18.

https://www.irs.gov/businesses/small-businesses-self-employed/family-help

Natalie Kolodij · Answer

@Dave Toelkes

Thank you I actually am well versed on how reasonable compensation works. I have a degree and years of experience in this.

In 2016 the first $6,300 a child makes was not subject to tax. This puts tax savings at $1,700 annually (assuming 28%) for having the kid help out.  So I think it's reasonable that over a year a teenager could work 12 hours a week at $10 an hour doing...office work. Answering phones. Cleaning up the break room. ect.

That's $6,300 of tax free income either way you cut it/

You're entitled to your opinion- it just happens to differ from what the majority of well known tax strategists suggest. There's literally a whole section in Mark Kohler's tax and legal playbook on this strategy. See below .....

Mark Kohler

NOLO.Com

Mark Kohler's Video

Investopedia

RN CPA

Dave Toelkes · Answer

@Natalie Kolodij

And I am saying that if the daughter did actually work for the business as an employee, then Kevin could claim a business expense for the daughter's salary/wages only if the reasonable salary/wage for the work actually perfomed was at least $20K.  If Kevin would have paid a cleaning lady $8 per hour to sweep/vacuum the floors and empty trash cans for a total of 4 hours a week, then paying his daughter the same wage for the same work might be reasonable.  On the other hand, paying a 13-year old $20K to sweep the floor and empty trash cans does not seem to be reasonable and may not survive an audit.

Let's say that the reasonable pay to sweep floors and empty trash cans totals $1664 annually in this example.  Kevin's annual tax savings might be as low as $250 for this business expense, but, would the daughter's tax on that income erase the potential savings for Kevin, given that Kevin either has give up the dependent deduction for the daughter, or the daughter can not claim a personal exemption on her return?

As a casual observer, I am just not seeing a potential total tax reduction significant enough to justify all the effort.

Can private school be a business expense?

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