Is Your MBA Tax Deductible?
Court Rules Against MBA Student Seeking Tuition Tax Break
Admit it: You’ve thought about it. We all have. “Can I deduct my MBA off my taxes?” It makes sense. Your MBA is a business expense, right? And doesn’t the IRS know that this investment will help you generate so much more tax revenue over your career?
As always, the answer is, “That depends.” Thanks to a recent decision by Tax Court Judge Kathleen Kerrigan, it might be more difficult to represent business school as a tax-deductible expense.
Kerrigan’s decision stems from a case brought by Adam Hart, a 2011 Rollins College MBA, who claimed a $17,138 deduction for his 2009 tuition costs. However, the IRS disputed this deduction, which resulted in the case being sent to tax court. In her decision, Judge Kerrigan ruled that Hart was not consistently “carrying on a trade or business” before enrolling at Rollins. What’s more, his employers, for whom he worked for a short time, did not require him to enroll in an MBA program. Due to a lack of work experience and an employer-mandated education requirement, Hart was not entitled to a deduction for his unreimbursed business expenses.
So are there any situations when business school students can claim a tax deduction on their tuition? Again, that depends. Generally, such deductions cannot be claimed for MBA degrees, let alone for law or medical degrees. However, Robert W. Wood, a Forbes contributor and Bay Area tax attorney, notes that the “general rule is that education expenses are deductible if they maintain or improve skills required in your business or employment, or if your employer (or law) requires you to do it to keep your job or your current status with your employer.” That said, Wood cites three areas where the IRS will not accept a deduction:
“Is needed to meet the minimum requirements for your present or intended employment or business;
Is undertaken to fulfill general education goals or for other personal reasons; or
Is part of a program that qualifies you for a new trade or business.”
Still, there are exceptions. Reuters cites professionals who agreed that “MBA students may be able to convince the IRS their education is an expense if they have years of consistent experience built up before starting a program, and then return to that career after graduation.” Josh Nowack, a California accountant who prepares between 30 and 50 tax returns a year for clients who claim MBA tuition as a business expense, adds that the best candidate for reimbursement would be someone like an engineer, “who has worked for 15 years then gets an MBA to broaden his or her career opportunities.” Wood even cites a case, Singleton-Clarke v. Commissioner, where a woman with 24 years of nursing and administrative experience won her business expense deduction after showing the tax court that her online MBA made her more a more effective administrator.
Still, business expense deduction remains full of gray areas. For example, Bloomberg Businessweek muses whether a tax accountant who earns an MBA to become a CFO is actually starting a new career or advancing their current one. Says David Young, a partner at Young and Company, “There isn’t a bright line distinction that says, if you’ve worked so many years, making a certain salary, you can claim the deduction.”
So tread carefully. The IRS goes after cases with the greatest chance for victory. And the Hart case sets a strong precedent that the IRS can “read more broadly” according to Robert Willens, who teaches taxes and accounting at the Columbia Business School. As a result, they may challenge more deductions in the future, particularly larger ones.