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 courseload.

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 can deduct the cost of education as a business expense if you pass either 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 any of your expenses—even if you qualify under either one of these two tests—if you need the education to meet minimum pre-existing educational requirements for your current job or business or it qualifies you for a new job or business.

The application of these rules is often contested in the courts. Typically, the IRS prevails, especially if it claims the coursework qualifies the taxpayer for a new job or business. Usually you 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 because he wasn’t established in a job or business before enrolling in the MBA program. (Hart, TC Memo 2013-289) However, in a notable exception to the trend, the Tax Court 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 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 2% of adjusted gross income (AGI) deduction threshold.

Tip: Have your company pay for the business education. Employer-paid reimbursements are generally deductible in full by the company and tax-free to employees.

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zachary cunningham April 5, 2014 at 10:29 pm

According to DegreeRegistry.org, a general MBA can be obtained for as little as $6k and as high as $120k. If students would do a little research, they would find that it is not nearly as expensive to get a college degree.

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