Suppose that one of your clients intends to take a few courses at the local college to learn the latest developments in his or her field. Can the client deduct the education costs as a business expense? Although the IRS provides guidance, surprisingly, the answer isn’t clear-cut.
To qualify for business educations, a taxpayer must pass at least one of the following two tests:
- The education is required by your employer or by law to keep your present job. It must serve a legitimate business purpose.
- The education maintains or improves skills needed in your present job.
However, even if you pass one of these two tests, no deduction is allowed if either of the following is true.
- The courses are needed to meet the minimum education requirements of your present position
- The education is part of a program or study that will qualify you for a new trade or business.
As you can imagine, there’s a lot of “gray area” in these rules. In particular, it is difficult to establish whether education qualifies a taxpayer for a new trade or business. Typically, the IRS will argue that the courses are preparing you for another line of work, especially if you’re on the path to master's or another advanced degree. And the landscape is littered with cases in which the IRS has prevailed in these instances.
But that doesn’t mean it is always a lost cause. In one recent case, a registered nurse who took courses online was able to deduct costs attributable to attaining an MBA in business management. Although the MBA may have improved her skillset, she was already performing those tasks as part of her current job (Singleton-Clarke, TC Memo 2009-182).
Taxpayers who are eligible for a business education deduction can write off the following expenses:
- Tuition, books, supplies, lab fees and similar items.
- Certain transportation and travel expenses.
- Other education expenses, such as the costs of researching and producing papers.
Assuming the taxpayer is paying the tab, the expenses are deductible as employee business expenses on Schedule A. The deduction for all miscellaneous expenses, including employee business expenses, is limited to the excess of 2 percent of adjusted gross income. Thus, even if a taxpayer qualifies, the deduction may be reduced or eliminated due to this 2 percent threshold.
When possible, the best approach may be to have an employer reimburse employees for job-related courses. As a general rule, the reimbursements are tax-free to the employee and deductible by the company.