Education Tax Deduction For Businesses: What The New Stimulus Packages Means For Your Tax Deductions
It’s no secret that the COVID-19 pandemic had a massive effect on businesses, particularly when it comes to finances. Previously thriving businesses were forced to close their doors, implement changes to operations, or add in new sanitation procedures. While this was to protect the safety of the public, it all adds up financially.
Many business owners have taken advantage of some of the government relief offered as a result of the pandemic. Paycheck Protection Program loans and Economic Injury Disaster Loan grants helped businesses keep their employees on staff and keep their doors open.
In addition to these loans and grants, the government stimulus packages have also provided help through tax credits and deductions. These credits and deductions help cut tax liabilities and allow business owners to keep money in their businesses (and their pockets).
One tax benefit that hasn’t received a lot of attention is one that expands employer-funded tuition assistance. In this post, we’re going to look at the details of this student loan repayment benefit, how it affects employers and employees, and answer the most frequently asked questions about this law.
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What The Stimulus Package Means For Education Tax Deductions
The Coronavirus Aid, Relief, and Economic Stimulus (CARES) package passed in 2020 contained a provision that made it possible for employers to provide up to $5,250 toward an employee’s student loans tax-free. This payment could be made to the employee or directly to the lender or loan servicer. While an employer could certainly pay more if they chose to do so, only the first $5,250 was exempt from payroll and income tax. The provision included as part of the CARES Act was only valid through the end of 2020.
Fortunately, this provision was further expanded through the Consolidated Appropriations Act that was passed in December 2020. Now, employers can provide tax-free student loan repayment assistant programs (LRAPs) to their employees through December 31, 2025. The employer will not be required to pay payroll or income taxes on any amount up to $5,250 per employee. The employee will also not be required to report any amount up to $5,250 as taxable income.
Deducting Employee Education Expenses
Not only will you be exempt from taxes on up to $5,250 paid toward student loans, but this expense can also be deducted on your annual tax return. Per the IRS:
If you pay or reimburse education expenses for an employee, you can deduct the payments if they are part of a qualified educational assistance program. Deduct them on the “Employee benefit programs” or other appropriate line of your tax return.
In other words, any amount paid toward a qualified educational assistance program can be deducted on your return to help lower your tax liability. If more than $5,250 was paid, you can claim this as a deduction. However, you will be required to pay taxes on anything that exceeds this amount.
Do I Qualify For An Employer Student Loan Repayment Program Deduction?
As previously mentioned, employers may be eligible to provide tax-free student loan payments up to $5,250 per employee per year. However, in order to qualify, you must meet a few requirements.
Educational Assistance Program
All employers must have an educational assistance program (EAP) in place in order to qualify for tax-exempt employee loan payments. An existing program may be modified in order to meet all requirements set forth by the IRS. Your EAP must meet these requirements:
- It should be a written plan.
- Reasonable notice must be given to eligible employees.
- The program should not favor highly-compensated employees. A highly-compensated employee is one that was at least 5% owner in the current or previous year OR an employee that made more than $130,000 the previous year.
- No more than 5% of annual benefits should go to shareholders, owners, or their dependents or spouses.
- The program must not offer a choice between educational assistance, cash, or other benefits.
Student loan repayment assistance can be used to repay student loans used to cover the cost of tuition, books, and other fees. Funds cannot be used to cover loans taken to pay for:
- Tools & supplies (other than textbooks) that the student keeps after the course ends
- Education involving sports, games, or hobbies unless the course is required for a degree program OR has a reasonable relationship to your business.
Your employee must be able to verify that the employer-paid assistance was used for qualifying expenses.
If you meet the EAP requirements and your employee(s) will use assistance funds for eligible expenses, you can receive an exemption for your student loan assistance.
Don’t qualify for this deduction, or are you just looking for more ways to help your business weather the coronavirus storm? There are other forms of COVID-19 relief for business owners like you.
Business owners that need a low-interest, long-term loan may consider applying for the Small Business Administration’s (SBA) Economic Injury Disaster Loan (EIDL). This program provides loans to be used as working capital or to cover operating expenses. Eligible businesses that previously applied for an EIDL and operate in a low-income community may also qualify for a $10,000 Targeted EIDL Advance.
If you need help with payroll and other expenses, you may also qualify for a Paycheck Protection Program (PPP) loan. This provides you with up to $2 million that can be spent on payroll expenses, utilities, rent or mortgage interest payments, and other uses.
One thing to note is that funds were depleted during previous rounds of lending, so time is of the essence when applying for COVID-19 relief for your small business.
Getting The Most Out Of Your Small Business Deductions
Tax time can be overwhelming for even the most organized and prepared small business owner. However, you can ease your stress and lessen your tax burden by taking advantage of all small business deductions available to you. In addition to a deduction for employee education expenses, there are lots of other deductions that can help you keep more money in your pocket come tax time. Before you file, check out The Complete List of Small Business Tax Deductions to see how much you can save. Good luck!