BGBC Partners, LLP Tax Update: Deducting Costs to Pursue an MBA
As a business owner, you are well aware of the importance of learning new processes, techniques and procedures to keep your business a step-ahead of your competitors. Many business-owners have viewed obtaining a Master of Business Administration (MBA) as an opportunity to improve decision-making skills as they relate to their business. In this Tax Update, we will examine the rules of when costs for obtaining an MBA are deductible.
A recent Tax Court case (Long, TC Summary Opinion 2016-88) sheds some light on the various tests a business owner has to meet to obtain a deduction for these types of educational costs. First some general background.
Background. Education expenses are deductible under §162(a) if made by a taxpayer either to maintain or improve skills required by the individual in his employment or trade or business, or meets the express requirements of the individual’s employer, or the requirement of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation. (Reg. §1.162-5)
Deductions are not allowed if the education
1. Is needed to meet the minimum requirements for the taxpayer’s present or intended employment, trade, business or profession;
2. Is undertaken to fulfill general education aspirations or for other personal reasons; or
3. Is part of a program of study that will lead to qualifying the individual in a new trade or business.
In the Long case, the Tax Court determined that a taxpayer could deduct the costs of obtaining an MBA as an unreimbursed employee expense. The Court found that the MBA didn’t qualify him for a new profession but rather refined his existing business and investment skills used in his managerial position. It further concluded that the taxpayer remained in the same trade or business after attaining the degree.
Generally, the tax law considers employees as being in a trade or business. A taxpayer may deduct unreimbursed employee expenses incurred only as miscellaneous itemized deductions on Schedule A, and the only to the extent such expenses exceed 2% of the individual’s Adjusted Gross Income. Therefore, even if you can meet the general requirements, there might be limits based on your Adjusted Gross Income.
If you have thought about pursuing an MBA to enhance your role as a business owner, Uncle Sam might be willing to partly subsidize it. However, as you can see with the Tax court case discussed above, your specific facts are crucial to getting a deduction. Consult with a qualified CPA in order to determine whether you meet the statutory, regulatory and judicial tests necessary to avoid missing out on this educational opportunity and its related tax benefit.