01/28/2010
A very bright young man now entering an MBA program emailed us an article from the New York Times last week with the hopeful question: “Does this apply to me?” The article recounted the recent Tax Court case wherein a registered nurse, representing herself, took on the IRS and won! She was allowed to deduct the cost of earning her MBA in the amount of $15,000. This appears at first glance to be a victory for taxpayers, paving the way for more MBA students to write off their newly minted degrees. But before we all run out and enroll, here are a few thoughts as to why this case succeeded–while others may fail.
Higher education has been deductible for a long time with a couple of requirements:
1. Your employer has required you to take classes in order to KEEP your job; OR
2. The education improves or maintains the skills you need to perform your current job.
So, if the classes you are taking prepare you to do something new in life or are needed to meet the minimum educational criteria for even current employment, then, the cost is generally not deductible. [However, you might still be eligible for a credit or limited deduction on your return – if your income is below the limits for those tax benefits.]
In the past, the Tax Court has deemed that masters’ degrees qualify recipients for “a new trade or business” – and therefore the tuition and related costs are not deductible. But this case, Singleton-Clarke, TC Summary Opinion 2009-182, reexamines that reality. The taxpayer had worked for a very long time as a registered nurse and then took online classes, earning her MBA in health care management. At the time, her job was “quality control coordinator,” and she argued that the MBA would enable her to be more effective and credible. I think it worked, because she convinced the court in her favor—without a lawyer.
The Tax Court, which is a tough nut to crack, ruled that the MBA did not qualify the taxpayer for a “new trade or business,” that it simply improved the existing skills she had to perform her current job better. See the key here? She qualified under #2 above. She was already working in health care management in the eyes of the Court. I do not see this as a huge victory or a swing in opinion and so I would be cautious about taking large deductions for MBAs unless you can demonstrate that the degree met the criteria of either #1 or #2 above. I’m actually a little surprised that the IRS itself did not permit the deduction, which would have saved the expense of a Tax Court litigation.
If you can make a strong case for one of the requirements above to apply to you and your MBA (or other advanced degree), it isn’t just tuition that is deductible. Books, lab fees and supplies can be deducted, as well as the cost to get to school and park. You can deduct the standard mileage allowance which is 50 cents per mile this year. And if you take public transportation or even a cab, you can deduct that cost, too. The deduction is an itemized deduction, subject to the 2% of Adjusted Gross Income floor, if you are an employee. If you are a business owner, you may deduct the education costs on Schedule C in full – a very good deduction, indeed.
Even if it is a tiny bit of a stretch, do remember that you must be able to demonstrate that #1 or #2 apply to your circumstances if you are hoping to defend yourself. As for our bright young MBA student, he is an engineer currently supervising 20 employees. Will an MBA enable him to perform his current job more admirably (and thus deductibly)? With the help of Singleton-Clarke – probably.