Tax Court Okays Deducting Cost Of MBA
Even if you’re a business owner or manager, you could probably benefit from additional education. You might take some refresher courses at a local college, or you may decide to pursue an advanced degree, such as a master’s in business administration (MBA). But can you deduct your tuition and related costs as a business expense? Until now, the answer has usually been no. But the ruling in a recent Tax Court case may change that.
The cost of business education is deductible only if the education is required by your employer, or by law, to keep your current job, or if the education “maintains or improves” the skills needed in your present work. However, even if you qualify according to those rules, you can’t deduct any expenses if the education is needed to meet the minimum educational requirements of your current job or if it qualifies you for a “new trade or business.”
That last point is often the stumbling block in deducting the cost of education leading to an advanced degree. The tax law landscape is littered with cases involving paralegals who pursued law degrees and workers in comparable situations. The IRS frequently challenges deductions for graduate education and usually prevails in court. But not this time.
In this case, the taxpayer worked as a nurse for more than 20 years at several medical facilities, and she is now a quality-control coordinator for several hospitals. In 2005, she began taking courses online from the University of Phoenix. She graduated in 2008 with an MBA in health care administration. When the IRS denied a deduction of almost $15,000 in tuition for 2005, she decided to fight back in court.
The IRS argued that the advanced degree qualified the nurse for a new trade or business. But the Tax Court disagreed. Although the MBA improved her existing skills, she was already performing the tasks and activities of her current profession. As a result, according to the ruling, her tuition was deductible.
Even if your outlay for business education otherwise qualifies for a tax deduction, the costs must be written off as miscellaneous expenses, subject to a special floor. You can deduct miscellaneous expenses only to the extent the annual total exceeds 2% of your adjusted gross income. Depending on how much you earn, that floor could reduce or even eliminate your tax benefit. Also, miscellaneous deductions exceeding 2% of AGI are categorized as tax preference items when calculating Alternative Minimum Tax.
As an alternative—one that would also avoid any challenges from the IRS—you could set up or use an educational assistance plan at work. This type of plan allows an employer to provide up to $5,250 of annual, tax-free education benefits to each participant, no questions asked.
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