A taxpayer who represented herself in a Tax Court tussle with the IRS has prevailed in a surprising new decision. (Singleton-Clarke, TC Summary Opinion 2009-182) The court allowed the taxpayer to deduct almost $15,000 of tuition incurred to attain a master’s degree in business administration (MBA).
Alert: The new case may open the door to deductions in similar situations. In the past, the Tax Court generally has interpreted the complicated rules on business education in favor of the IRS.
For example, if you take additional courses to better yourself at work, you may now qualify for big deductions—even if the education leads to a new degree.
Here’s the whole story: You can deduct the cost of education as a business expense only if you pass one of these two tests:
- The education is required by your employer or by law to keep your current job.
- The education maintains or improves skills needed in your present work.
On the other hand, you can’t deduct your expenses—whether or not you qualify under either test—if the education is needed to meet pre-existing minimum educational requirements of your current employment or if it qualifies you for a new trade or business.
This sounds simple enough, but the lines can become blurry when you apply the rules to real-life situations. In particular, it’s often difficult to distinguish education that “maintains or improves” current job skills from education that qualifies you for a “new trade or business.”
The Tax Court has traditionally treated coursework toward a master’s degree as education that qualifies the student for a new trade or business. But there have been several noteworthy exceptions. Here’s the latest example.
New case: The taxpayer worked as a registered nurse for 24 years at a number of hospitals, medical centers and long-term care facilities. In 2005, she began taking courses online from an accredited university. The taxpayer graduated with an MBA in health care in 2008.
Although the MBA was not required for her job, the taxpayer believed the advanced degree would give her greater credibility and make her more effective in her present and future role as a quality-control coordinator.
The Tax Court ruled that the education did not qualify the taxpayer for a new trade or business. The MBA may have improved her pre-existing skill set, but she was already performing the tasks and activities of her trade or business. Therefore, the education expenses were deductible.
If you qualify under these rules, you can deduct the education expenses as business expenses. For employees, unreimbursed business expenses are deductible as miscellaneous expenses on Schedule A, subject to the 2%-of-AGI floor. Self-employed individuals deduct the expenses in full on Schedule C.
The expenses you may deduct as business education include:
- Tuition, books, supplies, lab fees and similar items
- Certain transportation and travel costs (see box below)
- Other related expenses (e.g., costs of producing term papers or school projects).
However, you can’t deduct personal or capital expenses, such as the cost of a new laptop or the value of leave time you use to attend classes.
Tip: If an employer pays for an employee’s education expenses under a qualified educational assistance plan, the employee can receive up to $5,250 of annual tax-free reimbursements.
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