Taxing Issues: Are MBA Expenses
Tax Deductible?
by Lewis A. Weinstein
Founder and CEO of GenerationTax

Deductible Requirements:
First, the education must be related to a trade or business which the taxpayer is “carrying on.” Secondly, the education involved must not be a minimum educational requirement for qualification in the taxpayers’ trade or business, nor can it qualify the taxpayer for a new trade or business. Finally, the education must maintain or improve skills required for the taxpayer’s trade or business.

The Gray Areas:
Concern 1: Am I “carrying on” (required answer: yes)? Attending graduate school full time generally precludes being actively involved in a trade or business. However, this is not, in and of itself, fatal. Assuming that you were engaged in a trade or business before coming to school (nowhere explicitly defined by the IRS, but significant work experience like that of most MBAs would generally qualify), a temporary leave of absence or other suspension of involvement in a trade or business is allowable. The IRS defines “temporary” as less than one year, but the courts have allowed for substantially longer absences (up to several years.)
 

Concern 2: Is an MBA a minimum educational requirement for my trade or business (required answer: no)? This disallowance criteria is generally not applicable to most MBAs pursuing graduate study in business, since their undergraduate degree will usually satisfy minimum entry requirements in most firms.

Concern 3: Is the education part of a study program that can qualify you in a new trade or business (required answer: no)? Many MBA classes are general in nature and are applicable to a wide range of management tasks and problems. Even more specialized classes i.e. a corporate tax class, should be valuable to most managers, but without qualifying them for a new trade or business. However, the language in the regulation and case law with respect to this limitation is so vague that it would be possible for the IRS to make such an assertion and very difficult for an individual to prove otherwise.

Concern 4: Does an MBA maintain or improve skills required doing your present work (required answer: yes)? The case law on this issue varies, but it is clear that the more business-like your old career and duties, the more likely you will be considered to be maintaining or improving skills.

The proper application of the above rules is frequently uncertain. Each taxpayer must analyze his/her specific circumstances in evaluating whether or not s/he qualifies to take a tax deduction for graduate school educational expenses. If you have questions with respect to your personal situation, I would strongly recommend that you utilize the services of a qualified tax preparation firm.

IRS Rules for Determining Eligibility

• Tuition & Fees.
• Case Materials and Books.
• Equipment & Software (if required by curriculum).
• Miscellaneous Supplies.

The Upside & Downside to Deducting MBA Expenses

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