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What Types of Education Expenses are Deductible? Some Recent Tax Court Cases
Cengage
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What Types of Education Expenses are Deductible? S...

Contributing Author Jim Young

In general, an employee or sole proprietor can deduct education expenses provided the expenses are:

  • To meet the specific employer requirements or legal requirements to keep his or her job, or
  • To maintain or improve existing skills required in the present job.

Education expenses are not deductible if the education is:

  • To meet the minimum educational standards for qualification in the taxpayer’s existing job, or
  • To qualify the taxpayer for a new trade or business.

So, for example, the cost of obtaining a master’s degree in accounting (as part of the 150-hour education requirement to sit for the CPA examination) is not deductible since it is qualifying the student for a new trade or business. The same is true of CPA exam prep courses. And, in general, this holds true for the costs of becoming a lawyer or a doctor or a physician’s assistant; you get a license to practice in the profession after you complete your studies and pass an examination (or examinations). However, most practitioners agree that there is no “bright line” test; the conclusion depends on all the facts and circumstances. This is especially true for an MBA degree. While an MBA is viewed as a professional degree, unlike a J.D. or an M.D., it is not a prerequisite for a specific profession.

Recently, two Tax Court cases allowed deductions for MBA expenses which “maintained and improved” the taxpayer’s skills in business. Interestingly, some of the expenses were incurred while the taxpayers were not employed . . . but they were previously employed and were subsequently employed.

Long v. Comm’r, T.C. Summary Opinion 2016-88
Kopaigora v. Comm’r, T.C. Summary Opinion 2016-35

In contrast, a 2017 decision disallowed the expenses incurred to earn an Executive MBA (EMBA). In this case, Creigh v. Comm’r, T.C. Summary Opinion 2017-26, the taxpayer had BS and MS degrees in computer engineering and many years of experience in that field. Prior to starting the EMBA program, she started her own consulting business. She thought networking and business leads would improve by earning an EMBA. The court noted that the courses included in the program, such as accounting, negotiation analysis, valuation, strategy, managing human resources, and business policy, qualified her to perform tasks and activities significantly different from those she had performed earlier. Thus, the court found that the education qualified her for a new trade or business and disallowed the deduction of tuition and travel.

In a non-MBA decision related to education expenses [Tanzi v. Comm’r, T.C. Memo 2016-48], an adjunct college professor and a college librarian (who were married) were not allowed to deduct the cost of home internet access, cell phones, and computer costs associated with increasing their “general knowledge.”

A recent Practical Tax Strategies article provides a detailed discussion of the two 2016 MBA opinions:

Derek A. Jones, Derek and Steven C. Colburn. “Is the Cost of That MBA Deductible as a Business Expense?,” Practical Tax Strategies, July 2017.

In addition, a number of news outlets provided some discussion of the 2016 MBA cases, including the Wall Street Journal and Forbes. A review of these 2016 and 2017 decisions will provide students a better understanding of the education expense deduction and the challenges of determining if an MBA or EMBA program is a deductible expense.

Classroom Discussion

Have your students read the Tax Court opinions and encourage them to look for other sources of information on the internet (including the Wall Street Journal and Forbes articles).

Discussion questions:

  1. What is the Tax Court? How does it differ from other courts?
  2. What was the ruling in the two MBA cases (Long and Kopaigora) and the EMBA case (Creigh)? What was the reasoning behind these decisions? What tax law supports the decisions? Why were the holdings different?
  3. What was the ruling in the Tanzi case? How did the Tax Court reasoning differ in this case (vs. the MBA cases)?
  4. Why did the IRS oppose the deductions in these cases? What was their reasoning?
  5. What is “precedent”? Why does it matter? How will it impact tax planning for other taxpayers?
  6. What questions would you ask of a client who asks you if MBA tuition is deductible? 

 

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SWFT Chapters

SWFT Volume 1 Chapter 9
SWFT Volume 3 Chapter 9
SWFT Volume 4 Chapter 11

 

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James C. Young is the Crowe Horwath Professor of Accountancy at Northern Illinois University. A graduate of Ferris State University (B.S.) and Michigan State University (M.B.A. and Ph.D.), Jim’s research focuses on taxpayer responses to the income tax using archival data. His dissertation received the PricewaterhouseCoopers/American TaxationmAssociation Dissertation Award and his subsequent research has received funding from a number of organizations, including the Ernst & Young Foundation Tax Research Grant Program. His work has been published in a variety of academic and professional journals, including the National Tax Journal, The Journal of the American Taxation Association, and Tax Notes. Jim is a Northern Illinois University Distinguished Professor, received the Illinois CPA Society Outstanding Accounting Educator Award in 2012, and has received university teaching awards from Northern Illinois University, George Mason University, and Michigan State University.