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Tax Tip: Spell Out Tax Rules for Business Education

Mar 29th 2012
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By Ken Berry

This is the seventh article in our series of tax return tips for 2011 returns. 

Did any of your clients go "back to school" in 2011? They may be entitled to a tax deduction for their unreimbursed education costs as employee business expenses. But the tax rules aren't exactly back and white – there's plenty of "gray area."

Generally speaking, you can deduct education expenses if the studies maintain or improve your skills in your current business or if you're required to take the courses to keep your current job. But you get no write-offs if the coursework qualifies you for a "new trade or business" or if it satisfies the minimum requirements for your current position.

In other words, if a client needed to take a refresher course last year to bone up on the latest developments in the field, the cost is generally deductible. But someone usually can't write off costs of obtaining a college degree if that's the minimum requirement for the job.

These definitions are often blurred, especially if a taxpayer pursues an advanced degree in a similar discipline. Traditionally, the courts have denied deductions in those cases, but several notable exceptions have gone the other way. In one recent case, a registered nurse was allowed to deduct the cost of obtaining an MBA because the Tax Court said the studies didn't qualify her for a new trade or business (Singleton-Clarke, TC Summary Opinion 2009-182). Conversely, a paralegal generally can't write off the cost of law school.

Assuming a client qualifies, the education deduction may include the following expenses:

  • Tuition, books, supplies, lab fees, and similar items;
  • Certain travel costs (e.g., transportation from work to school); and
  • Related expenses (e.g., costs of producing term papers or school projects).

But note that you can't deduct the cost of transportation from school to home or vice versa. The deductible travel must occur directly between work and school.

And there's yet another tax hurdle to overcome: Employee education expenses are deducted as miscellaneous expenses on Schedule A subject to the usual limit of 2 percent of AGI. Thus, a client may receive little or no tax benefit for the expenses. Self-employed individuals can deduct the expenses in full on Schedule C.

Finally, bear in mind that you can't deduct any costs that are reimbursed under a qualified education assistance plan. But that may be the optimal situation for plan participants. Reason: The first $5,250 in benefits received by an employee is tax free.  

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