Business Deductions for Work-Related Education
The tax code allows a taxpayer to deduct educational expenses for improving or maintaining current job skills, but not if the education qualifies the taxpayer for a new occupation. To be able to deduct work-related educational expenses as business expenses, the taxpayer must satisfy the following requirements:
- the taxpayer must be either working as an employee or be self-employed;
- employees can no longer deduct work-related educational expenses, but expenses paid from an accountable plan is not included as taxable income for the employee;
- the educational expenses must be deductible.
To deduct the expenses, the self-employed must use the applicable form: Schedule C, Profit or Loss from Business, Schedule C-EZ, Net Profit for Business, or Schedule F, Profit or Loss from Farming.
Under the Tax Cuts and Jobs Act, employee educational expenses are no longer deductible, but expenses paid from an accountable plan is not included as taxable income for the employee.
The self-employed can deduct educational expenses directly from business income, thus reducing gross income subject both income taxes and self-employment taxes. The deduction for work-related business expenses can also be combined with other deductions and educational tax credits. However, no expense can be offset by more than one deduction or tax credit.
The IRS offers a tool for determining whether work-related educational expenses can be deducted: Are my work-related education expenses deductible? - IRS
Does the Education Improve Current Skills or Does It Qualify the Taxpayer for a New Occupation?
Qualifying work-related education must be education that maintains or improves skills needed in the taxpayer's present work. The education can qualify even if it leads to a degree, unless the degree qualifies a taxpayer for a new trade or business or is required to meet the minimum educational requirements of the taxpayer's trade or business. Minimum educational requirements for a trade or business do not qualify as work-related education because without the educational requirements, the taxpayer would not be able to work in the trade or business. Thus, by getting the minimum educational requirements, the taxpayer is, in effect, qualifying for a new trade or business, in contrast to the situation where the law requires additional education simply to maintain a job that the taxpayer already has.
However, if the taxpayer receives more education than required by the employer or by law, the additional education still qualifies as deductible work-related education if it maintains or improves the skills required in the taxpayer's current job.
A subtle distinction to note is that if the education also qualifies the taxpayer for a new trade or business, even if it also maintains or improves skills required for the taxpayer's current work, then it will not qualify as work-related education, even if the taxpayer intended to improve current job skills and never intended to enter a new trade or profession.
Generally, educational requirements are determined by laws and regulations, professional or business standards, or by the employer. Once the minimum educational requirements have been met by the taxpayer, then, if the requirements are increased, and the taxpayer must take additional courses to meet the new requirements, it is not considered a new trade or profession. On the other hand, there is no presumption that the minimum educational requirements have been met by the taxpayer simply because she currently works in the trade or business. So a college student working for a company in the profession she is pursuing, cannot claim a work-related educational expense if the profession requires a college degree.
The new trade or business rule applies even if the taxpayer has no plans of entering the business. On the other hand, if duties have changed, requiring an additional education or a refresher course or additional studies of new developments in the field, this additional education is not for a new trade or profession, and therefore qualifies for the work-related education. Education that leads the taxpayer to be able to practice another aspect of the profession is considered work-related education rather than a new trade or business. So a psychiatrist studying at an accredited psychoanalytic institute to qualify to perform psychoanalysis is considered work-related education, and thus, deductible.
However, review courses to prepare for examinations frequently required for professionals, such as the bar examination or the exam for certified public accountant, are not considered qualifying work-related education, since they are necessary to qualify for the profession.
If the taxpayer takes a leave of absence from work to attend an educational institution on a temporary basis, then the absence is considered a temporary absence. Otherwise, the absence is considered indefinite, in which case, the tax law presumes that the education will qualify the taxpayer for a new trade or business, even if it also improves and maintains the skills of the taxpayer's job before the absence. That the taxpayer works for a different employer after the temporary absence will not disqualify the deductibility of the educational expenses, if the educational expenses would otherwise be qualified.
Temporary basis is defined as the expected attendance at school to be one year or less and that it actually does not exceed that time. However, if school attendance is realistically expected to last more than 1 year, then it is not considered a temporary basis, even if actual attendance turns out to be one year or less. If school attendance was realistically expected to not exceed 1 year, but later on, new information increases the expected time span to be more than 1 year, then the temporary basis is considered only temporary up until the time when realistic expectations changed, in which case, expenses incurred before the realistic expectations changed will still be deductible, but expenses incurred afterward will not be.
A regularly employed taxpayer who attends school on a temporary basis can deduct the round-trip cost of transportation between home and school or between work and school, regardless of the school's location, the distance traveled, or whether the school was attended on non-work days.
Generally, personal expenses are not deductible. Deductible expenses include tuition, books, supplies, lab fees, research and typing costs, and certain transportation and travel costs. However, no expenses can be deducted if paid with tax-exempt or excluded income or if used for calculating other educational tax credits or deductions, since the tax law never allows the application of credits and deductions for the same expenses nor can they be applied to expenses paid with tax-exempt income.
Deductible Travel Expenses
Local transportation costs of going directly from work to school are generally deductible and if the taxpayer is regularly self-employed, but goes to school temporarily, then the cost of returning from school to home is also deductible.
Deductible transportation expenses include the cost of using a car, bus, or subway, or taxi fares. If school attendance is expected to last more than 1 year, then transportation expenses are not deductible unless they are from work directly to school. If the taxpayer goes from work to home to school, then only transportation expenses that would be incurred had the worker traveled directly from work to school would be deductible.
Motor vehicle expenses can be deducted by using actual expenses or the standard mileage rate. Additionally, parking fees and tolls are also deductible regardless of the method used to calculate travel expenses. Travel and lodging are also deductible for any overnight trips to obtain qualifying work-related education. Meals are deductible, but subject to the 50%-cost limitation that applies to all meal expenses deducted as business expenses.
Travel expenses for qualifying work-related education are no different from travel expenses incurred by the self-employed for other business purposes. So, for instance, expenses for personal activities such as, visiting, entertaining, or sightseeing are not deductible. Whether a trip is mainly personal or educational depends on the particular facts and circumstances. However, an important consideration is the time spent in doing both. If the taxpayer spends more time on personal travel, then travel expenses will only be deductible if there is an educational reason for traveling to a particular location. However, expenses for any personal trips in the locality of the business-related destination are nondeductible.
If the trip is mainly personal, then the travel cost to and from the destination are nondeductible and only the percentage of meals and lodging equal to the percentage of the work-related education over the entire visit is deductible. So a taxpayer traveling from Philadelphia to Boston for work-related educational courses, who spends 3/5 of the time sightseeing, can deduct only 2/5 of lodging and meals; none of the expenses traveling to and from Boston are deductible.
Expenses for taking work-related courses on cruises or at conventions are limited and subject to additional tax rules. The tax code does not consider travel to be a form of education, even if it actually is, so it cannot be deducted even if it improves the skills in a current occupation.
Tax Treatment of Reimbursements
If an employee receives reimbursements from the employer, then the tax treatment depends on whether the reimbursements are made from an accountable plan or a nonaccountable plan. An accountable plan is one where expenses must have a business connection, where the employee must adequately account to the employer for the expenses within a reasonable time; and any excess reimbursement or allowance must be paid back to the employer within a reasonable time. Reimbursements under an accountable plan are not included as income to the employee, so reimbursed expenses under an accountable plan are not deductible.
Reimbursements or other expense allowance paid under a nonaccountable plan is generally included as income to the employee, but still is not deductible by the employee.
Deducting Business Expenses
For the self-employed, the expenses incurred because of work-related education, including expenses for a motor vehicle, travel, and meals, are deducted just as regular business expenses, by using the appropriate form: Schedule C, Schedule C-EZ, or Schedule F.
Special rules apply for the expenses of certain performing artists and fee-basis officials and for impairment-related work expenses.
Allowing Full Deductions for All Educational Expenses Could Increase Allocative Efficiency
Why not make all education fully tax-deductible, even if it leads to a new career? Why? Because the economy would work more efficiently. Aren't employers always complaining that there are not enough qualified people for their jobs? Much unemployment — specifically, structural unemployment — results because employers require specific skills, but not enough people with those skills are available to fill those positions, so the economy suffers as a result.
If they could afford it, more people would take additional education to go on to better paying jobs, and those better paying jobs pay more because the economy has the demand for them. As economists like to say, allocative efficiency is increased when labor has the skills demanded by employers. Therefore, it would benefit the economy to make educational expenses fully tax-deductible, against both earned income and employment taxes, and even allow the carry over of any losses to future years.
Over time, the initial loss in tax revenue will be regained from the higher wages of the better educated, and from the more efficient functioning of the economy, due to a smaller output gap. Moreover, recent graduates tend to spend more, which further stimulates the economy. After all, it makes no sense to allow the deduction of educational expenses when it furthers one's career, but not when it starts a new one.
Performing artists or government officials paid in whole or in part on a fee basis can deduct the cost of qualifying work-related education as an adjustment to gross income rather than as an itemized deduction.
Proof of any deduction must be kept for at least 3 years from the filing date of the tax return in which the deduction is claimed. Types of records that must be kept include:
- documents, such as catalogs, course descriptions, transcripts, that show periods of enrollment, the principal subjects studied, and other descriptions of educational activity;
- canceled checks and receipts for educational expenses that are being deducted;
- any amounts of any scholarship or fellowship grants received during the tax year.