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Tricky Tax Rules for Business Education Expenses

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Oct 6th 2016
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Now that the kids are back in school, some of your clients may have a yearning to shake out the cobwebs and brush up on the latest development in their field. Or perhaps they are dissatisfied with their current position and want to embark on a different career path.

In either event, they may decide to enroll in several courses or a curriculum at a local college.

Can you deduct these education expenses if you pay the tab yourself? The answer is a definite “maybe.” Not to be snarky, but the tax rules in this area are somewhat tricky.

For starters, to qualify for business education deductions, a taxpayer must pass at least one of the following two tests:

  1. The education is required by your employer or by law to keep your present job. It must serve a legitimate business purpose.
  2. The education maintains or improves skills needed in your present job.

However, even if you pass one of the two tests, no deduction is allowed if either of the following is true:

  1. The courses are needed to meet the minimum education requirements of your present position.
  2. The education is part of a program or study that will qualify you for a new trade or business.

In other words, if education helps you in your current job, you still can’t deduct the cost if it provides a leg up in another line of work.

As you can imagine, there’s a lot of room for interpretation of these rules. Typically, the IRS will argue that courses are preparing you for another trade or business, especially if you’re pursuing a master’s or some other advanced degree. And the landscape is littered with cases in which the IRS has prevailed against taxpayers.

Nevertheless, there’s some hope. In one new case, a controller and manager for a nationally known hotel near Los Angeles International Airport enrolled in a master’s program at Brigham Young University. Eventually, he lost his job but still completed the degree. He was then hired as vice president of a small financing company.

The Tax Court ruled that the courses improved his managerial and leadership skills, yet didn’t qualify him for a new trade or business. Thus, the cost was deductible (Kopaigora v. Commissioner, TC Sum. Op. 2016-35, 8/2/16).

Assuming you’re eligible for a business education deduction, you may write off the following expenses:

  • Tuition, books, supplies, lab fees, and similar items.
  • Certain transportation and travel expenses.
  • Other education expenses (e.g., costs of researching and producing papers).

Remember that education 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 above 2 percent of adjusted gross income (AGI). Therefore, even if you qualify, the deduction may be reduced or eliminated due to the 2 percent-of-AGI limit.

Alternatively, an employer may reimburse employees for job-related courses or pay the school directly under an approved educational assistance plan, as authorized by the IRS. As a general rule, reimbursements or payments of up to $5,250 are tax-free to the employee and deductible by the company. If possible, this is usually a better approach and removes the uncertainty of deductions for individuals.

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