Case — Deductibility of Education Expenses

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TL Case Summ

THE QUESTION

Are tuition and fees incurred in obtaining a Master of Business Administration (MBA) degree deductible as ordinary and necessary business expenses?

THE DISPUTE

Taxpayer Says: The MBA was necessary to maintain or improve skills in working as an entrepreneur, project manager, or supervisor in the beverage industry, and the related expenses are deductible.

Internal Revenue Service Says: The MBA qualifies the taxpayer for a new trade or business, so the tuition and fees are nondeductible personal expenses.

THE LAW

From Federal Tax Regulation 1.162-5(a): Expenditures by an individual for education are deductible as ordinary and necessary business expenses if the education maintains or improves skills required by the individual in her employment or other trade or business.

From Federal Tax Regulation 1.162-5(b): Educational expenses incurred to meet the minimum educational requirement for qualification in a taxpayer’s  trade or business and those which qualify a taxpayer for a new trade or business are considered personal and are not deductible as ordinary and necessary business expenses.

From Schwartz v. Commissioner, 69 T.C. 877, 889 (1978): A taxpayer must demonstrate a direct and proximate relationship between the education and the skills required in her employment.

From Robinson v. Commissioner, 78 T.C. 550, 552 (1982): When education qualifies a taxpayer to perform significantly different tasks and activities from those she could perform before, that education is deemed to qualify the taxpayer for a new trade or business.

THE CAUSE OF THE DISPUTE

You can generally take an itemized deduction for educational expenses, including expenses that lead to a degree, if you need the education to maintain or improve your present skills or if the education is imposed as a condition of employment. However, the expenses are not deductible when the education qualifies you for a new job or is necessary to meet the minimum requirements for a job.

The dispute arose because, while an advanced degree such as an MBA meets the requirement of maintaining or improving skills, it also creates qualifications to enter a new trade or business, even when there is no intention to do so.

In this case, the taxpayer had a bachelor of engineering degree and worked as a project manager. She believed acquiring the MBA improved her project management skills. The IRS takes the position that the MBA qualified the taxpayer for a new trade or business, since engineering project management and business administration are not the same trade or business.

WHAT WOULD YOU DECIDE?

Make your selection, then see “The Court’s Decision” below for a full explanation

For the or for the

THE COURT’S DECISION

Download (PDF, 28KB)

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HL Carpenter, an experienced investor and a CPA, specializes in reader friendly articles on taxes and investing for individuals and small businesses, and publishes two newsletters: Taxing Lessons and Top Drawer Ink. Visit TaxingLessons.com and HLCarpenter.com.

This information should not be considered legal, investment or tax advice. Taxing Lessons and Top Drawer Ink Corp. do not provide legal, investment or tax advice. Always consult your legal, investment and/or tax advisor regarding your personal situation.

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Sorry, wrong answer :(
Right answer!
For the IRS. The proper focus is on the effect the MBA had on the jobs the taxpayer was qualified to perform. After receiving the MBA, she was qualified to perform business, management, finance, and marketing tasks she was not qualified to perform before. The expenses are nondeductible.
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