Claiming Business Deductions for Work-Related Education Costs
Posted on Wednesday, February 08, 2017
If you're headed back in the classroom, or thinking about it, you might be wondering if the tuition expenses are tax deductible. To be considered work-related education for business deduction purposes, the training must meet one or both of the following standards:
Standard No. 1: The education is expressly required by applicable law or regulations in order for you to retain your current professional status.
Standard No. 2: The education maintains or improves skills required in your current profession or business.
Example 1: A self-employed radiologist runs his business as a single-member LLC. He is treated as a sole proprietor for tax purposes. To retain his state license, the radiologist must take professional education courses each year. The courses count as work-related education because they meet Standard No. 1. So he can deduct the costs as business expenses. The deductions reduce his federal income tax bill, his SE tax bill, and his state income tax bill (if applicable).
Education Cannot Train You for a New Profession or Business
To qualify as work-related education, training cannot prepare you for a new profession or business. This rule applies even if you have no intention of actually entering the new field. In one case, an accountant was not allowed to deduct expenses to obtain a law degree even though he did not intend on becoming a practicing attorney. While the law school education undoubtedly improved skills used in his current work as an accountant, it also trained him for the new profession of being a lawyer, and that was a no-no. (O'Donnell, 62 TC 781, 1974)
Undergraduate Program Cannot Be Work-Related Education
The IRS has stated an undergraduate degree automatically trains you for a new profession or business. Therefore costs to obtain a BA or BS cannot be deducted as business expenses (presumably the same is true for a community college associates degree). The U.S. Tax Court has repeatedly agreed with the IRS on this issue. (Case examples include Malek, TC Memo 1985-428; Meredith, TC Memo 1993-250; and Fields, TC Summary Opinion 2001-35.)
But an MBA Program Might Be Work-Related Education
The IRS has also taken the position that an MBA degree automatically trains you for a new profession or business. So, according to the government, you cannot deduct MBA costs as business expenses. Thankfully, a number of Tax Court decisions have ruled that deductions are allowed when the MBA training maintains or improves skills used in your current profession or business. In this case, the MBA program counts as work-related education because it meets Standard No. 2.
If the MBA degree also happens to enhance your resume, accelerate your career path and increase your earnings, that is not a problem, according to the Tax Court. (Case examples include Allemeier, TC Memo 2005-207; Beatty, TC Memo 1980-196; Blair, TC Memo 1980-488; and Singleton-Clarke, TC Summary Opinion 2009-182.)
However you cannot deduct MBA costs as business expenses if the education does, in fact, train you for a new profession.
Example 2: A self-employed graphic designer is pursuing an MBA at night in order to become a marketing consultant. She cannot deduct the costs as business expenses, because the MBA trains her for a new profession.
How Self-Employed Individuals Deduct Work-Related Education
If your business is unincorporated, you are considered self-employed for most tax purposes. As such, you can claim deductions for business expenses, including work-related education expenses, on Schedule C of Form 1040 if you are a sole proprietor, on Schedule E if you are a partner or rental property owner, or on Schedule F for farming or ranching activities. This amounts to favorable treatment because Schedule C, E and F deductions reduce both your federal income tax bill and your self-employment (SE) tax bill (if you pay the SE tax). They also reduce your state income tax bill (if applicable).
Key Point: Make sure to keep proof that the expenses are business-related (course descriptions) and the amounts (receipts or credit card statements) with your tax records.
Employees: Your Corporation Can Deduct Work-Related Education Expenses
If you are an employee of your own C or S corporation, you should turn in work-related education expenses to the company for reimbursement. The reimbursements are a tax-free fringe benefit to you (no income or employment taxes), and the company can deduct them as business expenses.
If you pay the costs yourself and are not reimbursed, you can only write them off as itemized unreimbursed employee business expenses. Then you can only deduct them to the extent they exceed 2% of your adjusted gross income (AGI) when combined with other miscellaneous itemized deduction items such as investment expenses and fees for personal tax advice and return preparation. The 2%-of-AGI rule often precludes any actual tax savings. One more thing: under the AMT rules, no write-off is allowed for miscellaneous itemized deduction items. So if you are in the AMT zone, you may not get any tax savings from work-related education expenses.
Bottom Line: For the best tax outcome, turn in work-related education expenses to your company for reimbursement, and make sure to keep proof of the expenses with the company's tax records.
Other Education Tax Breaks
There is also a non-business deduction and two non-business tax credits for education expenses. Sometimes, these breaks can also be claimed for work-related education expenses, and they may be worth more than the business deductions explained in this article. Consult with your tax professional about the best way to proceed in your situation.
Posted in Tax Topics For Individuals
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