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Learn tricky rules on business education

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in Small Business Tax,Small Business Tax Deduction Strategies

It’s almost time for the kids to go back to school. How about you?

Strategy: Take some classes related to your business. If you’re merely sharpening your current skills, you can deduct the cost of the tuition, plus certain other expenses.

However, if the coursework is a stepping stone to a new degree or another job or occupation, you usually aren’t allowed to deduct the cost.

Generally, you can deduct the cost of education as a business expense if

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

Conversely, you can’t deduct any expenses—even if you otherwise qualify—if the education is required to meet the pre-existing minimum educational requirements of your current job or business or it qualifies you for a new job, occupation or business.

Granted, this is sometimes a fine line to walk, because the difference between “maintaining or improving skills” and “qualifying for a new job, occupation or business” might be difficult to distinguish. Not surprisingly, the issue often ends up in the courts. In one fairly recent decision, the Tax Court approved deductions for a registered nurse who was taking courses to attain a master’s degree in business administration. (­Singleton-Clarke, TC Summary Opinion 2009-182)

When allowed, the write-off for job or business-related expenses covers costs like tuition, mandatory fees, 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 travel costs if you stop at home for a snack or to change your clothes.

If you qualify and you’re a company employee, the business education expenses must be deducted as miscellaneous expenses, subject to the usual deduction threshold of 2% of adjusted gross income (AGI). Even better: If your company pays for the business education, reimbursements are generally deductible in full by the company and tax free to you.

Tip: Alternatively, your company can use an educational assistance plan providing up to $5,250 in annual tax-free education benefits a year.

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