Key Takeaways

• Before reviewing a 1065, 1120S, or 1120, confirm you have the full return and the applicant's K-1. Incomplete submissions are common and will slow your review.
• The number of partners or shareholders and the applicant's ownership percentage affect how much of the business income actually applies to the applicant.
• Box 1 on the K-1 reflects the applicant's share of ordinary income or loss. Box 16 (S Corp) or Box 19 (partnership) shows distributions. Do not count both — that will overstate income.
• The "other deductions" statement and Form 4562 can reveal vehicles or expenses paid by the business that the family may also be claiming as personal.
• When in doubt, go directly to the applicant for clarification. Your Client Success Manager is also available to help with complex returns.

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No matter how much financial aid experience you have, seeing a 1065 or 1120S as part of a family’s financial aid application can cause many to take a long pause and even consider moving on to another application to review. Before your blood pressure rises and you break into a sweat, these key tips will make your next financial aid business tax review less overwhelming. 

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1. Do you have everything you need?

Before you start delving into your business tax review, the first question you want to answer is whether you have all of the documents that you need. Take a moment to confirm that you have a complete 1065, 1120, or 1120S, which are around five pages (but can be longer), and the applicant’s K-1 (for 1065 and 1120S). Often, families may forget to include the “other deductions” statement or only provide the 1065 or 1120S and don’t include the appropriate K-1s. 1120s (C Corps) are rarer and can be more challenging to decipher. You may ask your CFO to review those with you or consult with your Client Success Manager (CSM).

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2. How many partners/shareholders are there, and what percentage do they own?

A partnership must have two or more partners, whereas an S corp can have between one and ninety-nine shareholders. The number of partners/shareholders is on the first page of both the 1065 and the 1120S on Line I. If the S Corp has one shareholder, then the 1120S information pertaining to the business only applies to them, whereas if a partnership has 30 partners, the 1065 does not pertain to just one partner but to the entire group. Just as important as the number of partners/shareholders is the percentage the applicant holds within the business. One can find the percentage on line J for a 1065 K-1, or line F for an 1120S K-1. If the shareholder has 1% of the business, typically, their earned portion of the total income will be proportionally small. However, if the shareholder has 75% of the business, their portion of the total business income will be much larger. 

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3. What is the difference between Box 1 and Box 16/19 on the K-1?

Each partner/shareholder receives a K-1, which indicates their individual profit and loss from the business. Box 1 of the K-1 indicates the partner/shareholder’s share of ordinary income or loss for the year. That figure will also be found on the applicant’s Schedule E.

‍Box 16 (S Corp) and Box 19 (partnership) indicate the distribution the individual received from the business. If Box 1 is larger than Box 16/19, the partner/shareholder kept money in the business for some reason. If Box 16/19 is larger than Box 1, the partner/shareholder received additional money from the business for that year, which would not show up on their personal 1040. The difference between Box 16/19 and Box 1 could be added back as nontaxable income. I would encourage you not to include both Box 1 and Box 16/19 in your calculations, as that would account for more income than the partner/shareholder received from the business. 

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4. What other aspects of the 1065 and 1120S should I consider?

Two areas you may want to focus on in the 1065 and 1120S are the other deductions statement and the 4562 Form (depreciation). By reviewing the other deductions statement, you can get a sense of how much a business has spent on supplies, travel, etc. For example, car/truck expenses could be listed on the statement, which may indicate that the business has purchased vehicles the partner/shareholder is using for business and personal use. By reviewing the 4562 Form, one can identify if vehicles were purchased by the business and whether they have been identified as being solely for business purposes. By quickly reviewing the financial aid application, one can see if those same vehicles are being listed as personal use cars by the family. If that is the case, you may want to take it into consideration when evaluating the applicant's family’s personal expenses for transportation. 

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While there is enough material to write a whole book on business tax reviews for financial aid, I hope some of the topics I mentioned above help you in your review process. One final thought to share is that if you ever have any questions after reviewing a 1065, 1120s, or K-1s, don’t hesitate to contact the applicant directly for answers. It goes without saying that you can also reach out to your CSM, who would be happy to offer their help reviewing business tax documents.

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