Taxing Lessons Case Summaries

Case — Deducting Educational Expenses

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TL Case Summ

THE QUESTION

Can a human resources employee deduct educational expenses incurred while obtaining a doctorate degree?

THE DISPUTE

Taxpayer Says: A doctorate of education degree would improve skills needed for professional duties of training, developing, and educating other company employees, and also would be useful for future opportunities within the human resources profession. The expenses should be deductible.

Internal Revenue Service Says: The doctorate of education degree program qualifies the taxpayer to enter into the new trades or businesses of consulting and teaching. The duties and responsibilities of consulting and teaching are different in nature than those associated with the human resources profession. The expenses are nondeductible.

THE LAW

From Internal Revenue Code Section 162(a): Generally allows as a deduction “all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”, including the trade or business of being an employee.

From Federal Tax Regulation 1.162-5(a): Expenditures made by an individual for education are deductible as ordinary and necessary business expenses if 1) the education maintains or improves skills required by the individual in her employment or other trade or business, or 2) meets the express requirements of the taxpayer’s employer, or of applicable law or regulations, imposed as a condition to the retention by the taxpayer of an established employment relationship, status, or rate of compensation.

From Federal Tax Regulation 1.162-5(b): The general rule under section 1.162-5(a) does not apply if the expenditures fall within either of two specified categories; i.e., they are nondeductible expenditures if: (1) they are incurred to meet the minimum educational requirements for qualification in a taxpayer’s trade or business; or (2) they qualify the taxpayer for a new trade or business.

THE CAUSE OF THE DISPUTE

Generally, when you pay for tuition, books and certain other educational expenses in order to meet requirements set by your employer or to maintain and improve skills in your current work, you can claim an itemized deduction. Expenses that meet either of those requirements are not deductible when you need the education to meet the minimum qualifications for your work, or if you’ll be qualified for a new trade or business as a result of the education.

In this case, the taxpayer works in a corporate human resources department. While her employer did not require the additional education, she believes pursuing a doctorate degree will improve her skills in her current line of work, and that the expenses she incurred should be deductible.

The IRS agrees the degree will improve her skills as a human resources professional, but says the expenses are not deductible because they qualify the taxpayer to enter into the new trades or businesses of consulting and teaching.

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, 13KB)

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Note: Taxing Lessons provides a summarized version of sometimes lengthy court decisions. The full case may include facts and issues not presented here. Please use the link provided in the post to read the entire case.

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 educational expenses are not ordinary and necessary expenses to the taxpayer’s trade or business in the human resources profession. The doctorate degree in education will qualify the taxpayer to enter into a new trade or business (e.g., consulting and/or teaching), and are not deductible.
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