Employees can deduct educational expenses if the coursework allows them to improve or maintain their job skills or if their employer or the law requires them to attend the classes. But educational expenses are not deductible if the courses are taken to prepare for a new trade or business or to comply with minimal employment requirements. The Tax Court uses a “commonsense approach” to determine whether a degree program qualifies a taxpayer for a new trade or business. It compares the tasks and activities taxpayers performed before they entered the program with those they can perform after completing the degree program.
When Daniel Allemeier began his career as a part-time salesperson at Selane Products Inc., he was a college student. After graduating he worked for the company full-time and was quickly assigned additional responsibilities, such as designing marketing strategies and organizing product seminars. After three years the company president suggested that he obtain an MBA degree to improve his business skills and advance more quickly. When Allemeier enrolled in the program, he was given additional responsibilities by the company such as analyzing financial reports, designing sales plans and assessing marketing campaigns.
Because he was not reimbursed for his educational expenses, Allemeier listed them on his 2001 federal tax return as miscellaneous itemized deductions, subject to the 2% floor. The IRS disallowed the deductions and, in 2003, assessed a deficiency for the underpayment of his 2001 taxes. The taxpayer petitioned the Tax Court for relief.
Result. For the taxpayer. Both sides agreed the taxpayer’s education improved his job skills; however, the IRS argued that the MBA was a minimum educational requirement for promotion, so the expenses were nondeductible. The court found Allemeier’s participation in the MBA program was not a precondition for receiving a promotion because he had been promoted several times before. Although the company encouraged him to pursue an MBA, it did not require it.
The IRS argued Allemeier’s degree qualified him for a new trade or business, which it described as an “advanced marketing and financial management” position. The service contended that, before he received his MBA, Allemeier had mainly performed sales duties, and afterward, more advanced marketing and financial tasks. The court, however, found his job duties were essentially unchanged. The promotions he had received did not mean that he had entered a new trade or business. Further, the court said, Allemeier’s degree did not lead to a professional license or certification.
In this case the taxpayer’s duties before he entered the MBA program did not significantly differ from those he performed after he received the degree. However in McIlvoy v. Commissioner , TC Memo 1979-248, the Tax Court denied a deduction for the cost of receiving an MBA. In that case the taxpayer had performed mainly technical duties before receiving his degree, but mainly managerial duties afterward.
Daniel R. Allemeier v. Commissioner, TC Memo 2005-07.
Prepared by Charles J. Reichert, CPA, professor of accounting, University of Wisconsin, Superior.