As a Maine-based small business owner, you may be considering going back to school to gain new skill to help your business. Are the tuition expenses tax deductible? The training must meet one or both of the following standards to be considered work-related education for business deduction purposes:
- In order to retain your current professional status, the education is expressly required by applicable law or regulations.
- The education maintains or improves skills required in your current profession or business.
Education Cannot Train You for New Profession or Business
A very important thing to remember is that training cannot prepare you for a new profession or business and be tax-deductible. This rule applies even if you have no intention of actually entering the new field. As an example, an accountant was not allowed to deduct expenses to obtain a law degree even though he did not intend on becoming a practicing attorney. The education he received surely improved skills he used as an accountant, but it trained him in a new profession and was therefore not tax-deductible.
Undergraduate Program Cannot Be Work-Related Education
From the IRS’ point of view, an undergraduate degree automatically trains you for a new profession or business, and therefore costs to obtain a BA or BS cannot be deducted as business expenses. The Tax Court has repeatedly agreed with the IRS on this issue.
An MBA Program May Be Work-Related Education
The IRS has also taken the position that an MBA degree automatically trains you for a new profession or business, and therefore MBA costs cannot be deducted as business expenses. However, a number of Tax Court decisions have ruled that deductions are allowed when the MBA training maintains or improves skills used in your current profession or business.
If the MBA degree also happens to enhance your resume, accelerate your career path, and increase your earnings, that is not a problem, according to the Tax Court, but if it solely trains you for a new profession, the expenses cannot be deducted.
How Self-Employed Individuals Deduct Work-Related Education
If your business is unincorporated, you are considered self-employed for most tax purposes. As such, you can claim deductions for business expenses, including work-related education expenses. This could reduce both federal income taxes and self-employment taxes.
Remember to make sure to keep course descriptions as proof that the expenses are business-related, as well as the receipts showing the amount paid with your tax records.
Employees: Your Corporation Can Deduct Work-Related Education Expenses
If you are an employee of your own C or S corporation, work-related education expenses should be turned in to the company for reimbursement. The reimbursements are a tax-free fringe benefit to you and the company can deduct them as business expenses.
If you pay the costs yourself and are not reimbursed, you can only write them off as itemized unreimbursed employee business expenses. Then you can only deduct them to the extent they exceed 2 percent of your adjusted gross income (AGI) when combined with other miscellaneous itemized deduction items. The 2 percent-of-AGI rule often precludes any actual tax savings
Therefore, for the best tax outcome, turn in work-related education expenses to your company for reimbursement, and make sure to keep proof of the expenses with the company’s tax records.
Other Education Tax Breaks
There is also a non-business deduction and two non-business tax credits for education expenses. Sometimes, these breaks can also be claimed for work-related education expenses, and they may be worth more than the business deductions explained in this article. Consult with Filler & Associates about the best way to proceed in your situation.