Change Federal Methodology Regarding Losses on the Tax Return

Current Law:

Need Analysis is covered in The Higher Education Act, Title IV, Part F. It specifies using Adjusted Available Income as the starting point in the analysis. In practice, this has been defined to mean Adjusted Gross Income from the federal return plus various forms of untaxed income.

Issue:

Losses from the operation of businesses, farms, and rental properties reduce the Adjusted Gross Income, the starting point for looking at resources available from income. Often, the loss is a paper loss resulting from the IRS allowing non-cash expenses such as depreciation and amortization. The system creates an inequity between families who cannot reduce their income through tax incentives and those who cannot.

Proposal:

These operating losses are often a function of allowing non-cash expenses, such as depreciation and amortization, to reduce income. These expenses should be treated as non-taxed income and added to the worksheet for non-taxed income.

Possible Objections:

This proposal will expand the worksheet for non-taxable income, making the application more complicated.

Counter Argument:

Families that operate businesses and farms and mange rental property are used to complex reporting requirements; the federal FAFSA and its worksheets are simple documents compared to the record-keeping and reporting required for federal and state taxes.