MBA Students May Lose Tax Deduction

The days of being able to deduct the expense of attaining a master's degree in business administration may be over.

The U.S. Tax Court ruled against Tracy McEuen earlier this month, mostly because she didn't return to her previous job after earning her degree. McEuen had sought to deduct $20,317 in MBA-related expenses.

Current rules allow MBA candidates to deduct school expenses if they will use the degree to enhance their skills in their current job or the job they left to go to school, Dow Jones Newswires reported, adding that school costs can total $40,000 a year at the best schools.

In McEuen's case, the Tax Court ruled against her because she used the degree to change careers and the degree was a requirement for the new job.

"We definitely feel we have a legitimate position," McEuen told Dow Jones Newswires. The 34-year old, who obtained her MBA from Northwestern University's Kellogg School of Management in Evanston, IL, and is now living in Evansville, IN. Before attending graduate school she worked as a financial analyst. Today she is a marketing manager. "A good portion of my education was directly related to what I was already doing."

The verdict in her case will be treated like a “private-letter” ruling, which does not bind other courts, but is available for their consultation. However, it furthers a trend of judges and the IRS ruling against MBAs in future cases.

"It's one more case in a line of unbroken cases going against the MBAs," Robert Willens, a tax and accounting expert at Lehman Brothers Holdings Inc., told Dow Jones.

He added that those claiming the MBA deduction may be more susceptible to IRS audits. "Quite frankly, it's pretty much over," said Willens, who also teaches finance at Columbia Business School in New York. "It's going to be virtually impossible to take a deduction for education expenses," he said. "I'm having a hard time coming up with a scenario where you can claim a deduction."

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