If you are considering getting a MBA degree or currently in the process of earning one, a recent U.S. Tax Court ruling further clarifies the rules that allow you to deduct the cost of your education.
Lori A. Singleton-Clarke v. Commissioner, U.S. Tax Court, T.C. Summary Opinion 2009-182 is an important recent case specifically addressing MBAs. It involved a nursing coordinator who earned a MBA with a specialization in health care management.
Her job involved working with patients, physicians and employees to coordinate, plan and implement a hospital’s performance improvement strategies. She realized that nursing had changed greatly in the 24 years since she had earned her bachelor’s degree, and felt disadvantaged working with highly-educated doctors. Hence she sought her MBA.
When she sought to deduct her education expenses, the Internal Revenue Service denied the deduction. The taxpayer — without any legal help — fought the IRS decision.
In the past it has been difficult to deduct education-related expenses. Education expenses are not deductible if their purpose is to meet minimum educational standards for an existing job or qualify an individual for employment in a new job field. Individuals can’t deduct fees incurred for professional qualification exams and review courses and can’t obtain reimbursement from the employer for the education expenses.
Tax law does allow individuals to deduct employment-related expenses provided they are incurred to maintain or improve existing job skills or designed to meet an employer’s express requirements.
With the nursing coordinator, the issue was whether the MBA qualified her for employment in a new job field. The IRS generally takes the view that if a person is working and earns a MBA, the odds are she is trying to get out of that job into something new. In fact, after receiving her MBA, the nursing coordinator received a promotion.
The nursing coordinator argued that she would have received the promotion anyway because of her qualifications. Because she remained in the healthcare field, she said her education expenses were deductible.
The Tax Court agreed with her. It stated that the relevant standard should be whether the education objectively qualifies the individual for employment in a job field that is different from the one where he or she is presently employed.
With this approach, the subjective intent in getting the MBA and whether the person gets a new job afterward are not relevant.
Further, the Tax Court ruled that a MBA is a more general course of study that does not lead to a professional license or certification and so differs from one needed to qualify for a job (such as a CPA license). The Tax Court concluded that while the MBA may have improved the taxpayer’s existing skill set, it did not qualify her for a new job field. Hence she was allowed the deduction.
While not changing the law, this ruling clarifies the conditions where you can deduct the cost of getting a MBA.
Let’s say you work in marketing at your present company and decide to earn a MBA at Butler to sharpen your skills and performance in your job. Under this ruling, your MBA expenses would be deductible.
You would not qualify for the deduction if you needed the MBA to get a marketing job or switch fields — say, from accounting to finance.
Of course earning a MBA can open more than one door, professionally. Let’s say getting the MBA would strengthen your skill set in your existing job and also qualify you for a new job — perhaps teaching your particular field at the undergraduate level.
In that instance, if the MBA degree is seen as a vehicle that allows you to switch to a new employment field, the deduction might be denied. If you maintained that you sought the MBA to improve your performance in your current job, however, you would probably be allowed to deduct your education expenses.
This means you should look carefully at your particular circumstances to see if this important ruling would apply to you earning your MBA. And if it does … did I mention we have a wonderful MBA program at Butler?
Chuck Williams is dean of the College of Business at Butler University. Bill Terando, associate accounting professor at the COB, contributed to this article. For more information on the College and its “real life, real business” approach to business education, visit www.ButlerRealBusiness.com or e-mail Chuck at email@example.com.
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