When is Education a Business Deduction?

Tax laws are complicated and one of the things we are asked about is education reimbursement. When can you, a business owner, deduct education?

The internal revenue code allows a full deduction for certain education expenses related to your current trade or business. Part of having a career is staying on top of new ideas and processes in your industry. Sometimes this takes the form of classes at a local college or university. In certain situations these expenses may be fully deductible to small business owners. This usually results in a much larger deduction than those available to all taxpayers.

To qualify for business education deductions the training must pass at least one of the following  tests:

  1. The education is required by your employer or by law to keep your present job and has a legitimate business purpose.
  2. The education maintains or improves skills needed in your present job.

However, even if you pass one of the two tests, no deduction is allowed if either of the following is true:

  1. The courses are needed to meet the minimum education requirements of your present position.
  2. The education is part of a program or study that will qualify you for a new trade or business.

Even if the education is needed in your current job you can’t deduct it as a business expense if it helps you get a job outside your current one. These situations depend heavily on their individual facts and circumstances, with the IRS consistently arguing that the classes prepare the taxpayer for a new trade or business and the taxpayer arguing that the classes simply maintain current levels of education in their current trade or business.

In Kopaigora v. Commissioner, TC Sum. Op. 2016-35, 8/2/16) the US Tax Court ruled in favor of the taxpayer where he had taken classes master level classes at Brigham Young University. The Tax Court ruled that the courses improved his managerial and leadership skills, yet didn’t qualify him for a new trade or business. Therefore, the cost was deductible.

When available the deduction includes tuition, books, supplies, fees, and other education expenses. Travel can also be included in certain circumstances.

The deduction is also available to employees as a Sch A deduction, but will be reduced by 2% of the taxpayer’s AGI.

It’s never a good idea to interpret the tax laws alone. At D.Mathew Blackburn, we pride ourselves on our awareness of the tax laws of both the US and the state of Colorado. How can we help?