Education is learning what you didn’t know you didn’t know, according to philosophy professor George Boas. In tax court, learning what you didn’t know may be worth a deduction, even if you didn’t know you could claim one.
Treasury regulation 1.162-5 explains the general rule. To be deductible, education expenses must first satisfy two requirements. They must be for education that maintains or improves your job skills, or that your employer or a law requires so you can keep your salary, status or job.
There’s another hurdle even if the education meets either of these tests. The education cannot be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.
What does that mean? As an example, say you take courses that lead to your practice in a licensed profession such as law or real estate. Those education expenses are generally not deductible.
On the other hand, if you’re an employee, a change in your duties does not constitute a new trade or business if the new duties involve the same general type of work you do in your present employment. An example of this is a classroom teacher who shifts from teaching mathematics to teaching science or to working as a guidance counselor or principal. That teacher has not embarked upon a new trade or business.
In Docket No. 12562-14S (Long), the taxpayer, a management and administrative professional, worked for a nonprofit that established preschools. The taxpayer’s title was “executive assistant” though she was a member of the nonprofit’s management team.
On the recommendation of her boss, the taxpayer enrolled in courses in a Master of Science degree program in Organization Development. Organization development can be described as a deliberately planned, organization-wide effort to increase an organization’s effectiveness and/or efficiency and/or to enable it to achieve its strategic goals. Students in the program studied training, personal development, team development, team building, and learning and development.
At the time of her enrollment, the taxpayer held a Bachelor of Arts degree in communications. She had 20 years of overall work experience as an employee and/or homemaker. She had also managed and trained event and administrative staff, and had worked in public relations and as a liaison. She had not previously studied organizational development and she acquired knowledge in the program that she had not previously possessed. Her coursework also increased her ability to stimulate an effective, robust board of directors for the nonprofit. Team-building was an element of her work at the nonprofit before, during, and after her graduation from the program.
On her 2010 federal income tax return, the taxpayer deducted $23,492 of tuition expense incurred while taking the degree program. Though she deducted the expense against income earned as a consultant, she and the IRS agreed she did not have a trade or business in 2010.
The question then became whether the tuition expense met the requirements of treasury regulation 1.162-5 and was deductible as an itemized expense.
The taxpayer did not contend that either the nonprofit nor any law or regulation obliged her to enroll in the program. Therefore, the court considered only whether the taxpayer’s studies in the program maintained or enhanced skills required for her roles as board liaison and executive assistant.
The taxpayer testified that her coursework in the program enabled her to better foster an effective and robust board of directors. She said she applied the team-building expertise she acquired in the program in her job duties. Her performance evaluations revealed that as board liaison she managed the nonprofit’s relationship with the board and coordinated the board’s activities. Her course of study enabled her to better assist the board in developing and implementing educational strategies and in managing organizational change.
The IRS said the program was “too general an education to qualify as a deductible business expense” and that the curriculum was unrelated to the taxpayer’s duties at the nonprofit. The IRS described those duties as “primarily administrative and clerical.”
The court disagreed with the IRS, saying the effectiveness of the nonprofit’s board of directors depended largely upon the taxpayer’s coordination, communication, and guidance. In the program, the taxpayer studied how to measure and enhance an organization’s effectiveness and how to manage organizational change. The court concluded the taxpayer’s studies in the program improved the skills required for performance of her then-existing employment.
That left the last hurdle of the education not leading to qualification in a new trade or business. What matters in making this determination is not whether the taxpayer did engage in a new trade or business using the skills and knowledge she gained from the program, but whether that education qualified her to engage in a new trade or business.
The IRS said the program qualified the taxpayer to work as an organizational development consultant. The taxpayer entered the program in 2009 and graduated in 2011. In 2012 she formed a corporation of which she is the sole shareholder and employee. On its social media page the corporation holds the taxpayer out as an advisor/consultant.
The taxpayer said she performed the same tasks and activities in her job before, during, and after completing her studies. Her scope of work changed somewhat in 2011, when the nonprofit moved her from full-time to part-time, but she did not change jobs until December 2013, when she began working at a university. She did form a corporation in 2012, but testified that she had done consulting work for only one client through the corporation and that the corporation’s only business presence is on the social media page. Other than work performed for a friend, the taxpayer never provided consulting services via her corporation, although she and the corporation remain available to do so.
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Before enrolling in the program, the taxpayer had studied communications, managed and trained event and administrative staff, worked in public relations and as a liaison, managed the nonprofit’s relationship with its governing board, and provided the tools, information, and coordination necessary to the board’s effective oversight of a rapidly growing nonprofit organization.
The program curriculum qualified her to manage organizational growth and change, and to formulate and implement organizational strategies, and it developed her interpersonal and team-building skills.
There was significant overlap between the taxpayer’s experience and skills before the program and the enhanced expertise she gained from it. She remained a management and administrative professional whose duties centered on making organizations like the board more effective. Through the program, she learned contemporary academic theories and new techniques and methodologies applicable to the tasks she performed on a daily basis.
The IRS contends the program qualified the taxpayer to work as an organizational development consultant.
The taxpayer’s lack of success in attracting clients for her corporation — she has done work for only one client since forming the company in 2012 — suggests otherwise. At the nonprofit and later at the university where she worked, the taxpayer continued to be employed in “the same general type of work” and did not become qualified to perform “significantly different tasks.”
For the foregoing reasons, we conclude the taxpayer’s continuing education tuition expense satisfied the requirements of section 1.162-5, income tax regulations, and is allowable for 2010 as a miscellaneous itemized deduction.