33.15 Work-Related Tests for Education Costs

Educational costs are not deductible on Schedule C (self-employed) or Schedule A (employee) if you are unemployed or inactive in a business or profession. The cost of “brush-up” courses taken in anticipation of resuming work is also not deductible.

You are not considered unemployed when you take courses during a temporary leave of absence lasting one year or less.

Course must not meet minimum standards.

You may not deduct the cost of courses taken to meet the minimum requirements of your job. The minimum requirements of a position are based on a review of your employer’s standards, the laws and regulations of the state you live in, and the standards of your profession or business. That you are presently employed does not in itself prove that you have met the minimum standards for your job.

If minimum standards change after you enter a job or profession, courses you take to meet the new standards are deductible.

Teachers.

The minimum educational requirements are those that existed when you were hired. If your employer set no tests fixing a minimum educational level, you meet the minimum requirements when you become a member of the faculty. Whether you are a faculty member depends on the custom of your employer. You are ordinarily considered a faculty member if: (1) you have tenure, or your service is counted toward tenure; (2) the institution is contributing toward a retirement plan based on your employment (other than Social Security or a similar program); or (3) you have a vote in faculty affairs.

That you are already employed as a teacher, with all the responsibilities of a teacher, may not establish that you have met the minimum educational requirements. A school system that requires a bachelor’s degree before granting a permanent teaching certificate may grant temporary or provisional certificates after a person has completed a number of college credits. Renewal of the provisional certificate may be conditioned on the teacher’s continuing education for a bachelor’s degree. In this case, the IRS will disallow a deduction for the educational costs. The minimum requirements are not met until the teacher has the degree.

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image Planning Reminder
Teacher’s Job Change
Elementary and secondary school teachers may deduct the cost of courses taken to make any of the following job changes: (1) elementary to secondary school classroom teacher; (2) classroom teacher in one subject (such as mathematics) to classroom teacher in another subject (such as English or history); (3) classroom teacher to guidance counselor; or (4) classroom teacher to principal. These are not considered a change to a new business.
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Course must maintain or improve job skills.

To be deductible, the education must maintain or improve your current job skills. That you are established in your position and that persons in similar positions usually pursue such education indicates that the courses are taken to maintain and improve job skills. However, the IRS may not allow a deduction for a general education course that is a prerequisite for a job-related course.

If the courses lead to a change of position or promotion within the same occupation, a deduction for their cost will usually be allowed if your new duties involve the same general type of work. If, as a consequence of taking a job-related course, you receive a substantial advancement and the IRS questions the deduction of the course costs, be prepared to prove that you took the course primarily to maintain or improve skills of your existing job. However, if the course leads to qualification for a new profession, the IRS will disallow a deduction even if the course also improves current job skills.

Courses must not lead to qualification for a new profession.

If a course improves your current job skills but leads to qualification for a new profession, the course is not deductible, even if you have no intention of entering that business or profession. For example, a deduction is not allowed for the cost of law school or medical school courses since they prepare you for a new profession. This is true even if you do not intend to practice medicine or law. The IRS with Tax Court approval has also held that a deduction is not allowed for the cost of college courses that are part of a degree program, such as a bachelor of arts or science degree.

If you are practicing your profession, the cost of courses leading to a specialty within that profession is deductible. For example, a practicing attorney may deduct the cost of a master’s of law degree program (LLM).

Further education required by employer or law.

If, to retain your present job or rate of pay, your employer requires you to obtain further education, you may deduct the cost of the courses. The fact that you also qualified for a raise in pay or a substantial advancement in your position after completing the courses should not bar the deduction.

The employer’s requirement must be for a bona fide business reason, not merely to benefit you. Only the minimum courses necessary for the retention of your job or rate of pay are considered by the IRS as taken to meet your employer’s requirement. You must show any courses beyond your employer’s minimum requirements were taken to maintain or improve your job skills.

EXAMPLES
1. Allemeier was originally hired as a sales representative by a manufacturer of orthodontic appliances. An outstanding employee, he quickly advanced in the company and was given greater responsibilities, including sales strategizing and conducting seminars. While he was encouraged in his decision to pursue an MBA, the corporation neither required such a degree for advancement nor reimbursed employees for the expense. Allemeier was promoted to several higher positions before obtaining the MBA. The Tax Court determined that Allemeier’s MBA did not lead to a new trade or business and therefore his tuition payments were deductible. The MBA merely enhanced the skills he already used on the job, specifically, giving him a better understanding of financials, cost analyses, marketing, and advertising. His job requirements did not significantly change after he obtained the MBA.
2. A practicing dentist returned to school full time to study orthodontics while continuing his practice on a part-time basis. When he finished his training, he limited his work to orthodontics. The IRS ruled he could deduct the cost of his studies. His post-graduate schooling improved his professional skills as a dentist. It did not qualify him for a new profession.
3. A practicing psychiatrist may deduct the cost of attending an accredited psychoanalytic institute to qualify to practice psychoanalysis. A social worker has also been allowed a deduction for the cost of learning psychoanalysis. In one case, the Tax Court allowed a psychiatrist to deduct the cost of personal therapy sessions conducted through telephone conversations and tape cassettes. The court was convinced that the therapy improved his job skills by eliminating psychological blind spots that prevented him from understanding his patients’ problems.
4. A licensed practical nurse may not deduct the costs of a college program that qualifies him or her as a “physician’s assistant,” which is a new business. Physicians’ assistants and practical nurses are subject to different registration and certification requirements under state law, and, more importantly, the physician’s assistant may perform duties, such as physical examinations and minor surgery, which go beyond practical nursing duties.
5. Edward, a self-employed golf instructor without an undergraduate degree, earned an associate’s degree in business from the Golf Academy of the South. The IRS and Tax Court disallowed his deduction for tuition and fees. It does not matter that the courses may have improved his skills as a golf instructor. No deduction was allowed because completing the associate’s program was a first step in acquiring a basic undergraduate degree that would qualify Edward for a variety of trades or businesses other than that of a golf instructor.
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image Caution
Are MBA Courses Deductible?
The cost of MBA courses is deductible if the courses enhance the skills required in your current position, are not a minimum job requirement, and do not qualify you for a new business. If an MBA degree is required to obtain a promotion to a new position, the MBA is a minimum job requirement and no deduction will be allowed. For a deduction, the courses must be related to your existing job responsibilities and not lead to qualification for a new business. The Tax Court has allowed deductions for MBA expenses where individuals with some managerial or administrative experience took the courses to improve skills needed for their existing jobs.
In one case, a college graduate who took a summer job before starting MBA courses was not allowed a deduction because he had not yet established himself in a business or employment; the summer position was just a temporary stage between schooling.
If your employer reimburses you for MBA courses that qualify for a deduction, the reimbursement is a tax-free working condition fringe benefit; (3.6).
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