A new Tax Court ruling that allowed an employee to deduct education-related expenses opens the door for small business owners to do the same.
You can typically write off business education that's required for your job or maintains or improves your current skills. But you usually can't deduct costs that qualify you for a new job, even if you're not necessarily aiming for one.
Traditionally, courts have turned down education deductions for MBAs, law degrees and medical degrees on the argument that those degrees qualify the person for a new job.
The case: A salesman was given some marketing responsibilities. His boss speculated that an MBA would help the salesman advance in the company and provide him with a better background in marketing and business
The company didn't reimburse employees for education expenses, so the salesman paid his own way. He deducted the education expenses, but the IRS challenged the deductions, saying the MBA qualified him for a new job.
Surprising result: The Tax Court allowed the salesman to write off the MBA costs because the "basic nature" of his duties at work before and after his degree didn't change significantly, so the MBA didn't prepare him for a new line of work. (In previous cases, the courts—looking beyond the person's current job—have denied MBA deductions because they could qualify the person for a different job, regardless of whether he or she left for another job or not. (Allemeier, TC Memo 2005-207)