Deductibility of Work-Related Educational Expenses

EXECUTIVE SUMMARY * Tax clients going back to school for work-related reasons should be apprised of rules for deducting education as a business- or employment-related expense. Generally, deductions may be taken for education that maintains or improves skills in an occupation or meets legal or employer requirements for retaining the taxpayer's employment, status or pay. * Education is not deductible if it is undertaken to meet minimum requirements for a job or qualifies the taxpayer for a new trade or business. It also must be directly related to the taxpayer's trade or business and, as a business expense, and necessary. Additional considerations apply to abroad or by cruise ship. * Travel expenses of education may be deductible but not if the is primarily for personal reasons, including travel as a form of education. Other business requirements of transportation costs must also be met, including, for meals and lodging, that the be from home. * Taxpayers should carefully substantiate expenses by contemporaneous records, including any employer reimbursements. ********** [ILLUSTRATION OMITTED] The effects of the Great Recession are still being felt in high unemployment rates and other symptoms in the U.S. job market. The Business Roundtable reported in late 2009 that even as employment shrank, 60% of employers said they had trouble finding qualified applicants for the vacancies they had. Eighty-one percent of workers said they were interested in obtaining more job-related education or training (Getting Ahead--Staying Ahead, The Springboard Project, tinyurl.com/32f3n83). Thus, more workers than before are likely to go back to school to improve their chances of getting or keeping a job. In some situations, education-related transportation or can be deducted as a business-related or unreimbursed employee expense, but the rules can be perplexing for taxpayers, who must substantiate such costs with clear, contemporaneous records. Fortunately, CPA tax practitioners can stand ready to help clients make such transitions and maximize their deductions without running afoul of the rules. Some educational expenses such as tuition may qualify for the American opportunity credit, Hope scholarship credit, lifetime learning credit and the tuition and fees deduction, but transportation expenses and room and board are not considered qualified expenses for these purposes. Taxpayers should compare the tax benefits of the different credits and deductions available for educational expenses. It is possible that a combination of different credits and deductions for different educational expenses may render the best tax result for the taxpayer. IRC [section] 162 and Treas. Reg. [section] 1.162-5(e) provide that if an education expense, including an expense for away from home, is deductible as an and business expense, it may be deductible. MAINTENANCE OR IMPROVEMENT OF SKILLS Treas. Reg. [section] 1.162-5(a) provides that to be deductible, expenses must be for education that maintains or improves the taxpayer's skills or that meets legal or employer requirements for the taxpayer to maintain his or her employment, status or pay level. Nondeductible expenses include those for education to meet an employer's minimum requirements for a position or those that qualify the taxpayer for a new trade or business. Taxpayers must be prepared to substantiate in detail a direct relationship between the expense and the taxpayer's business or employment. This determination will depend on the specific facts of each case, and the taxpayer will bear the burden of proof. Whether such educational expense is under section 162(a)'s ordinary and necessary language and in the sense of Treas. Reg. [section] 1.162-5(a)--that it maintains or improves required skills or requirements set by an employer or law or regulation to maintain employment, pay or status in a job or business--has sometimes been defined as education that is appropriate or helpful in meeting such requirements and conditions. …