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Review tax rules for education expenses

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in Small Business Tax,Small Business Tax Deduction Strategies

Are you planning to go to school to sharpen your business skills or chart a new career path? Depending on your situation, you may be able to deduct the cost of your course load.   

Strategy: Master the tax rules in this area. Then you can figure out how much, if anything, you can save in taxes.

For starters, you may deduct the cost of education as a business expense if you pass either one of these two tests:

  1. The education is required by your employer or by law to keep your current job.
  2. The education maintains or improves skills needed in your present work.

On the other hand, you can’t deduct any of your expenses—even if you qualify under either one of these two tests—if the education is needed to meet the minimum pre-existing educational requirements for your current job or trade or business or it qualifies you for a new job or trade or business.

As you might imagine, this matter is often contested in the courts. Typically, the IRS will prevail in these cases, especially if it claims the coursework qualifies the taxpayer for a new trade or business. For instance, you usually can’t deduct grad school expenses, even if you’re already in the same general line of work.

Latest example: In a new case, a taxpayer who worked in pharmaceutical sales could not deduct the cost of an MBA degree because he wasn’t established in a trade or business before enrolling in the MBA program. (Hart, TC Memo 2013-289) However, in a notable exception to the trend, the Tax Court previously approved deductions for a registered nurse who paid $15,000 in tuition to attain a master’s degree in business administration. (Singleton-Clarke, TC Summary Opinion 2009-182)

How much can you deduct? There’s no dollar limit. Write off expenses like tuition, books, laboratory fees, equipment and transportation between work and school. For instance, if you go to class directly after work, the cost of your travel —whether by car, bus or train—is deductible. But you can’t deduct the travel costs if you stop at home for a bite to eat.

If you qualify under these standards and you’re a company employee, your business education expenses must be deducted as miscellaneous expenses, subject to the usual threshold of 2% of adjusted gross income (AGI).

Better approach: Have your company pay for the business education. Employer-paid reimbursements are generally deductible in full by the company and tax-free to employees. In this case, you don’t have to be concerned with the 2%-of-AGI threshold for miscellaneous expenses.

Tip: Alternatively, if your company establishes an educational assistance plan (EAP), you may receive up to $5,250 in tax-free benefits a year.

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