Given today’s high unemployment rate and cutthroat job market, many people are viewing higher education as a means to gain a competitive edge. If you’re heading back to the classroom to improve your marketability, you may be wondering whether the expense qualifies for education-related tax breaks.
Depending on your income level and other factors, you may qualify for education tax credits (such as the Hope credit or Lifetime Learning credit) or the tuition and fees deduction. Here, however, we’ll focus on deducting the cost of education as a business expense.
If you’re employed, qualifying education costs may be deducted on Schedule A as unreimbursed employee expenses. These are considered miscellaneous itemized deductions that are deductible only to the extent that the total of such deductions exceeds 2% of your adjusted gross income. If you’re self-employed, education expenses may be deducted on Schedule C.
It’s important to remember that education expenses are deductible only if they qualify as ordinary and necessary business expenses. So if you’re currently unemployed (with one exception, discussed below) — or otherwise not actively engaged in a trade or business — these expenses aren’t deductible.
Under IRS regulations, you can deduct the cost of education that:
What types of expenses might you deduct? For starters, the cost of courses that review new developments in your field or the cost of courses needed to meet continuing professional education (CPE) requirements. Even courses that lead to a degree can be deductible, provided they otherwise satisfy regulatory requirements.
Education expenses that fall into one of the above categories aren’t automatically deductible, however. The education must also relate directly to your trade or business and expenses must be reasonable, not “lavish or extravagant.” For example, expenses may be considered extravagant if you travel to an exotic location for education or if you stay in a five-star hotel. Also, education expenses aren’t deductible if you’re entitled to reimbursement from your employer (whether you apply for it or not).
What’s not deductible?
IRS regulations specifically exclude expenses for the following types of education, which are considered to be personal and, therefore, aren’t deductible:
Suppose, for example, that a college instructor with a bachelor’s degree must obtain a graduate degree to continue to hold her position on the faculty. Graduate courses are required to meet the minimum requirements for the job and, therefore, aren’t deductible. On the other hand, a high school teacher required only to have a bachelor’s degree can deduct the cost of graduate courses (provided the other criteria for deductibility are met).
Education that qualifies you for a new trade or business isn’t deductible, regardless of whether you actually intend to enter that new trade or business. So, for example, a corporate executive who attends law school at night can’t deduct the expense even if he has no intention of practicing law and the courses help him improve his skills in his current job.
What if you’re unemployed?
As noted above, education expenses are deductible only if they qualify as business expenses. If you’re unemployed, it’s difficult to meet this requirement because you aren’t actively engaged in a trade or business.
There’s an exception, however, for temporary absences from work. The IRS generally considers anything more than one year to be permanent or “indefinite,” but this time frame isn’t set in stone. The key is to show that you were previously involved in a trade or business, that you’re actively seeking to return to it (rather than a new trade or business), and that the absence is temporary rather than indefinite. Unfortunately, this can be difficult to prove in the current job climate.
The rules regarding deductibility of work-related education expenses are confusing. Before you go back to school, it’s a good idea to consult your tax advisor to find out whether your expenses are deductible and, if so, to ensure that you substantiate them properly. •
What about an MBA?
Whether you can deduct the cost of obtaining an MBA depends on your particular circumstances. The courts have allowed people to deduct MBA expenses when they were able to show that the education helped them maintain or improve the skills they were already using in their employment or trade of business.
So, for example, if you’re already in a management job, MBA expenses may be deductible if the coursework will help you perform your current job tasks. They’re not deductible, however, if the degree will qualify you to move into a management position.