Situation: A client of mine will be starting business school part-time this fall. His employer will not be reimbursing his tuition expenses of $30,000 per year.
Question: Can he deduct the full amount of this expense on his Schedule A? Forget about the Hope & Lifetime Learning credits for now. We want to know if he can deduct the full amount of the tuition as an itemized deduction.
Answer: The short answer is that I believe my friend should go ahead and take the full deduction. There is no guarantee the IRS will allow it but a recent court decision is very encouraging. Read on for more details.
Section 162 of the Internal Revenue Code allows individuals a deduction for un-reimbursed business-related expenses. (The deduction is allowed only to the extent these and other miscellaneous items exceed 2% of the taxpayer’s AGI.)
In certain cases, job-related education expenses may be considered a business-related expense (Section 1.162-5). To qualify, the coursework needs to meet either of these two tests:
1. The classes must maintain or improve the skills needed to perform current job function.
2. The education is required by your employer or the law to keep your present salary, status or job.
However, if the coursework meets either of the next two tests, it is not qualifying work-related education, and thus not deductible:
1. The education is required to meet the minimum education requirement of a profession
2. The education will qualify you to perform a new trade or business
Because of these rules you can’t deduct your tuition for college, med school, or law school. Attending med school is a minimum requirement to become a doctor. Furthermore, graduating med school qualifies you to perform a new trade or business: being a doctor.
But what about business school? Generally speaking, an MBA does not qualify you to do any particular job. Moreover, it is not a truly a requirement for any profession that you have an MBA.
Until very recently however, the IRS did not agree with that assessment. In McEuen et. ux. v. Commissioner, the Court found that the MBA was indeed a requirement for the taxpayer’s industry (investment banking) and that the MBA qualified the taxpayer for a new trade or business (to be a full-fledged investment banker, as opposed to her previous title: Financial Analyst).
Earlier this year, however, in D.R. Allemeier v Commissioner, the Court ruled that the taxpayer, Daniel Allemeier, was allowed to deduct the full amount of his MBA tuition. The reason: his job responsibilities did not directly change as a result of the MBA.
Here is an excerpt from the Court opinion which addresses the rules listed above (Note: Respondent=IRS, Petitioner=taxpayer Daniel Allemeier):
Rule: MBA is not deductible if it is a requirement of his employment with the company
Court: We must determine, therefore, whether Selane products conditioned promotions, rather than employment generally, on petitioner beginning the MBA program. The record does not support respondent’s contention, however, that petitioner’s promotions were contingent on his beginning the MBA program. Encouraging petitioner to obtain MBA and speculating that he might advance faster with the MBA is not tantamount to a requirement that petitioner obtain the MBA. Moreover, we decline to find that a minimum education requirement existed merely because petitioner’s promotions happened to coincide with his enrollment in the MBA program.
Rule: MBA Does the MBA qualify the taxpayer to perform a new trade or business?
Court: We must next determine whether petitioner’s MBA qualified him to perform a trade or business that he was unqualified to perform before he earned the MBA. The Court has repeatedly disallowed education expenses where the education qualifies the taxpayer to perform “significantly” different tasks and activities.
Respondent claims that petitioner’s evolving duties and promotions after he enrolled in the MBA program demonstrate that petitioner was qualified for and indeed entered a new trade or business at Selane Products once he began the MBA program. In sum, respondent argues that the MBA qualified petitioner for the specific new trade or business of “advanced marketing and finance management.”
Petitioner disagrees and argues that the MBA enhanced and maintained skills he already used in his job, but did not qualify him for a new trade or business or for any particular promotions. Petitioner argues that the MBA merely capitalized on his abilities that he had before beginning the program, giving him a better understanding of financials, costs analyses, marketing, and advertising. After careful consideration, we agree with petitioner.
Accordingly, we find that petitioner’s MBA did not meet a minimum education requirement of Selane Products. Nor do we find that the MBA qualified petitioner to perform a new trade or business. Petitioner may deduct the amount of MBA tuition expenses.
Using this interpretation as precedent, it seems that MBA tuition will be allowed for many (if not most) people. It is highly dependent on individual “facts and circumstances” – the two most important being:
1. Did the MBA lead to a job in an entirely new field – one for which you would have been unqualified before earning the MBA?
2. Is obtaining the MBA a requirement of the job?
In other words, with careful planning and great documentation, the full amount of an MBA – which could be as much as $80,000 – can be written off. Great news!!
Whatever you do, don’t take this as specific advice. This post is meant as a starting point for further research and planning only.
Daniel R. Allemeier, Petitioner v. Commissioner of Internal Revenue
United States Tax Court T.C. Summary Opinion
McEuen, Petitioner v. Commissioner of Internal Revenue
United States Tax Court T.C. Summary Opinion
Section 1.162-4 Business Related Educations
Section 162 Trade or Business Expense
Business Deduction for Work-Related Education
Is An MBA Deductible?
Wandering Tax Pro
Tax Court Ruling Allows Deduction on MBA Degree
Wall Street Journal
Writing Off an MBA