MBA as itemized deduction

[Kea]

I know Taxbilly already posted this link: http://www.ustaxcourt.gov/InOpHistoric/SINGLETON-CLARKE.SUM.WPD.pdf here: My link

A WSJ article about this case was also sent to me by a client who now thinks he can deduct his $14K MBA expenses on Sch A. Of course, the WSJ article didn't discuss the legal details, only that she had been able to successfully convince the IRS to allow her MBA expense deduction.

Do y'all think this decision changes the way we approach this deduction? Does it give us any more leeway in what we include? Does it change the questions we ask? I generally ask if it was required and / or paid for by employer. And I try to get a sense of what their job was before & after. I have taken the IRS stance that an MBA will typically qualify you for another job even if you do not change jobs. (OK, I've only had one other client ask about this plus this same client last year.) I just want to verify that I understand the implications of this ruling before I ask my questions again this year.

I'm not a CPA or EA, so if IRS challenges this return, I won't be able to represent him.

Thanks!

[kcjenkins]

Well, just to be accurate, she did not successfully convince the IRS to allow her MBA expense deduction, she convinced the Tax Court. That said, this does not really cover new ground, it just upholds and perhaps clarifies a bit the prior rulings.

The most valuable part, IMHO, is this section:

"Respondent [iRS] contends that the MBA/HCM does qualify petitioner for a new trade or business, because in respondent’s words, under the regulation “the tasks and activities she was qualified for before she obtained the degree are different than those which she is qualified to perform afterwards”. We disagree.

An MBA degree is different from a degree that serves as foundational qualification to attain a professional license. For instance, this Court had denied deductions for law school expenses, because a law degree qualifies a taxpayer for the new trade or business of being a lawyer. See, e.g., Bodley v. Commissioner, supra; Weiler v. Commissioner, 54 T.C. 398, 401-402 (1970).

An MBA is a more general course of study that does not lead to a professional license or certification. Allemeier v. Commissioner, T.C. Memo. 2005-207. This Court has had differing outcomes when deciding whether a taxpayer may deduct education expenses related to pursing an MBA, depending on the facts and circumstances of each case. The decisive factor generally is whether the taxpayer was already established in their trade or business."

I think that is the key thing for you to explain to your client. Each case is somewhat different, of course, but understanding what the basis of the differing outcomes from cases that seem similar on first glance will help you to make the call.

[Kea]

Point taken on clarification of convincing court vs IRS.

His e-mail stated that he paid $14,161 in tuition and top portion (explanation area) of his W-2 states that his employer reimbursed him $3000 Non-taxable & $6000 taxable. Box 14 shows $9000 as "Tuition" (I haven't yet seen the 1098T for its limited value). I know I have to reduce his expense by the $3000, but I'm not sure about the $6000. I can make the argument either way. Reduce his amount because he didn't pay for it, but since he is on the hook for the tax on it, he should include that in his tuition amount to keep from having to pay that additional tax (i.e. treat like mileage reimbursement).

I'll probably have some follow-up questions after I discuss with the client.

Thanks so much.

[taxxcpa]

I know Taxbilly already posted this link: http://www.ustaxcourt.gov/InOpHistoric/SINGLETON-CLARKE.SUM.WPD.pdf here: My link

A WSJ article about this case was also sent to me by a client who now thinks he can deduct his $14K MBA expenses on Sch A. Of course, the WSJ article didn't discuss the legal details, only that she had been able to successfully convince the IRS to allow her MBA expense deduction.

Do y'all think this decision changes the way we approach this deduction? Does it give us any more leeway in what we include? Does it change the questions we ask? I generally ask if it was required and / or paid for by employer. And I try to get a sense of what their job was before & after. I have taken the IRS stance that an MBA will typically qualify you for another job even if you do not change jobs. (OK, I've only had one other client ask about this plus this same client last year.) I just want to verify that I understand the implications of this ruling before I ask my questions again this year.

I'm not a CPA or EA, so if IRS challenges this return, I won't be able to represent him.

Thanks!

I deducted the cost of my MBA. My employer paid most of the cost, but they added it to my salary. The IRS questioned me about the deduction. I told the auditor that I took the MBA courses to improve my skills in my present position. He allowed the deduction.

[Kea]

@ taxxcpa -- That's reassuring! If it looks like he meets the qualifications and then the IRS questions it, would you be willing to help him in his case? I can write letters but am not eligible to represent him? Obviously that would be subject to your review of the case.

I've sent him the e-mail with my questions. I'll see what he says.

Thanks!

[Catherine]

@ taxxcpa -- That's reassuring! If it looks like he meets the qualifications and then the IRS questions it, would you be willing to help him in his case? I can write letters but am not eligible to represent him? Obviously that would be subject to your review of the case.

I've sent him the e-mail with my questions. I'll see what he says.

Thanks!

I have a number of people who have pursued advanced degrees (mainly in the sciences) where the tuition they paid was repaid to them in their W-2 and taxed. The guidance from the employer was that the expenses were deductible on Schedule A (subject to 2% limitation). The degrees make them better at their jobs but don't qualify for new jobs. Folks at this place have been doing it this way for many years. So I've kept up the practice as these folks come my way. And there are dozens and dozens of folks every year at this same place and I only get two or three of them.

[Kea]

This is sounding more promising. When I was researching it before (2 or 3 years ago) I got the impression that IRS pretty much automatically disallowed MBA deductions. I do want to provide every legal deduction but I also want to make sure I don't cause an audit with a deduction I can't defend. That is no matter my reasoning they say MBAs don't count. I still haven't heard back from his e-mail.

[Kea]

It looks like it doesn't qualify. Or, am I being too strict?

He earned a Computer Science degree in 2002 and then started working as a Test Engineer. In late 2008, he became a Treasury Consultant. He started the MBA program in early 2008.

When I asked why he took the MBA courses, he answered: "To increase my growth potential at Dell by learning more managerial and financial skills"

The new skills he learned from the MBA: "Key skills learnt were management and financial knowledge to successfully manage teams and business unit"

Is the MBA part of a program of study that will qualify you for a new trade or business (does not matter if you actually changed jobs)? "Yes, it would be beneficial for future leadership roles at Dell and outside the company"

The degree wasn't required by Dell but would help him be more competitive with his co-workers (several of whom have MBAs). And he states that the degree will let him move into future leadership roles.

This all sounds like it meets the definition of qualifying him for a new job, trade or business. But, of course, all his friends in the classes have been taking the full deduction.

Am I just reading this too strictly?

Thanks!

[TAXBILLY]

I agree with your reasoning. In the court case the key fact was that the taxpayer was already doing the job that the MBA maintained or improved her skills. In your case the client is not doing that job but preparing for a future opportunity.

taxbilly

[Kea]

Thanks for backing me up. He won't like it, but I'm just not comfortable signing that return.

If he still wants to deduct, he can find one of his friends' preparers.

[kcjenkins]

It looks like it doesn't qualify. Or, am I being too strict?

The degree wasn't required by Dell but would help him be more competitive with his co-workers (several of whom have MBAs). And he states that the degree will let him move into future leadership roles.

This all sounds like it meets the definition of qualifying him for a new job, trade or business. But, of course, all his friends in the classes have been taking the full deduction.

Am I just reading this too strictly?

Thanks!

Yes, I think you are being too strict. ALL education improves your future options, but that is not how you measure it. Read the decision again. The point is that an MBA is not, in your case, a requirement to move into a new job, it gives him skills he's using in his current job. The fact that other employees in the same job have them just supports his taking the deduction. I'd take it, without any problem.

[Kea]

Even though the MBA qualifies him for moving up into management positions that he wouldn't have been eligible for otherwise?

[taxxcpa]

A friend of mine who was an engineer at ARCO got an MBA and he later became CEO of Noble Energy. He gives his MBA training a lot of the credit.

[kcjenkins]

Even though the MBA qualifies him for moving up into management positions that he wouldn't have been eligible for otherwise?

Yes. Even tho... The point is that it is not preparing him for a new occupation, it's merely improving his skills in his current job, which normally can lead to promotions over time. Almost all education does that. It's only when you get specialized education that prepares you for a different occupation that it is not allowed. So a nurse taking courses that broaden her nursing skills can deduct it, but if she took courses to become a doctor, that would be a new occupation.

An accountant getting an MBA would be able to deduct it, but if she was getting a Law degree she could not deduct that.