New Case Allows Deduction for Business Education

No matter how old you are, you can still learn to do your job better. For example, you might take a refresher course to stay on top of the latest developments in your field. Or you may enroll in a curriculum that will start you toward a new career.

Can you deduct the cost of your educational expenses? Only if you receive a “passing grade” under the tax law tests. Now a new Tax Court case provides more hope for individuals pursuing a master’s degree.

Basic rules: In general, education expenses are deductible if (1) the studies maintain or improve your skills in your current business or (2) you are required to take the courses to keep your present job. However, you generally cannot deduct these expenses if the courses (1) qualify you for a new trade or business or (2) satisfy the minimum requirements for your current position.
In other words, if a college or graduate school degree is the minimum requirement for a job, you may not be able to deduct the expense of obtaining the degree.

There’s often a fine line between passing and failing under the tax law. For instance, assume that a course both improves your current job skills and entitles you to a promotion. Deductible or not? It depends. These situations are handled on a case-by-case basis. But the courts have traditionally disallowed tax deductions for courses leading to advanced degrees.

Facts of the new case: An individual had worked as a nurse at a number of facilities for more than 20 years. In 2005, she began taking graduate courses online. She completed her MBA in health care management in 2008. Although the MBA was not required for her job, the nurse believed it would make her more effective, both currently and in the future, in her position as a quality control coordinator.

The Tax Court ruled that the education did not qualify the taxpayer for a new trade or business. Reason: The MBA may have improved her preexisting skill set, but she was already performing the tasks and activities of her trade or business. So she is allowed to deduct the education costs.

Assuming you qualify under the basic rules, you can deduct the cost of your tuition plus expenses for incidentals (such as books and supplies). In addition, you may also be able to deduct some expenses of your transportation between work and school.

Caution: Unreimbursed employee business expenses— including those education expenses—are treated as miscellaneous expenses. The total of all your miscellaneous expenses is deductible only to the extent it exceeds 2% of your AGI.

What if an employer pays directly for the education expenses or reimburses its employee for the cost? If certain requirements are met, the expenses are deductible by the employer and tax-free to the employee. Be sure to obtain professional guidance in this area.