How to Use a Section 127 Plan for a Big Deduction

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04 Oct How to Use a Section 127 Plan for a Big Deduction

If you have adult children and run your own business, then you want to consider a Section 127 plan.

What is a Section 127 Plan?

A Section 127 is a legal, education assistance plan that allows you to give your employees money for pursuing an education. This can also be applied to your own child if they work for you and are over the age of 21.

The result of giving out a Section 127 is that you can now deduct up to $5250 of your child’s college expenses (tuition and books). This deduction can be taken every year as long as the child is still your employee. This deduction can be taken multiple times if you have multiple employees on the plan.

Does This Work for Younger Children?

No. To qualify for the Section 127 deduction, then your employed child must be over the age of 21 AND not be listed as a dependent on your own return. If the child is under 21 or is a dependent, then the IRS recognizes them as having 100% ownership. Thus, giving an education assistance plan doesn’t work.

It’s also illegal if you still try to claim those deductions.

Other Things to Note

There are a few things you need to keep in mind if you plan on giving education assistance to your employees.

If you claim the deduction, be prepared to prove that your child is a working employee. Keep time sheets or other documents that could prove their involvement. Your child is not required to work a certain number of hours to receive the benefits, but there must be proof that they did work for you.

The education plan only covers tuition and books. You cannot use the benefit to cover meals, lodging, transportation, or extracurricular activities. The money only goes toward the fundamental education costs.

You also must notify and explain the details of the plan to your employees. You prevent any unwanted audits from coming your way.

This can be a lot to remember. If you have any questions about the Section 127 plan, give us a call at 614-524-4888!

We work closely with you to handpick a solution for your unique tax situation.
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