You can deduct as an "employee business expense" the cost of education that is (1) expressly required by an employer, by law, or by government regulation, or (2) maintains or improves skills required in your current trade or business.

Education is not deductible if it (1) is the minimum requirement for a trade or business, or (2) prepares one for a new trade or business, even if the taxpayer does not intend to enter that trade or business.

Deductible expenses include-

* tuition, textbooks, registration fees, and supplies,

* round-trip transportation to the education,

* meals (at 50%) and lodging while away from home,

* lab fees, student cards, insurance and degree costs, and

* writing expenses for term papers and dissertations (i.e. research and typing).

Are the costs of obtaining a Masters in Business Administration (MBA) or equivalent degree deductible as a business expense? According to the Tax Court - Yes and No.

YES:

A taxpayer was employed to sell sports-related products because of his prior experience in sports medicine. In the course of his job he performed management, marketing and financial tasks. Encouraged by his employer, he enrolled in an MBA program in the hopes of "moving up the ladder". As a result of his studies he was promoted.

The Tax Court, in D.R. Allemeier Jr, T.C. Memo 2005-207, found that-

* Encouraging the taxpayer to obtain an MBA degree as a means of advancing through the company did not amount to a "minimum requirement" for promotion, and neither did the fact that the taxpayer actually advanced as a result of the MBA program;

* The MBA degree did not prepare the taxpayer for a new trade or business, as he was already performing managerial and financial tasks before enrolling in the program, and, while he was promoted as a result of the MBA studies, he did not change the basic nature of his duties; and

* While a degree that qualifies a taxpayer for a professional certification or license, such as a law degree, may prepare him for a new trade or business even though he had previously been performing essentially the same tasks, an MBA does not qualify one for a professional certification or license.

The cost of the MBA degree was deductible.

NO:

A taxpayer had been employed by several financial firms as a "financial analyst". In the investment banking industry a financial analyst is a temporary position which usually does not last more than 2 or 3 years. An MBA degree is a requirement for an "associate", which is a permanent position. The taxpayer received a Master of Management degree, the equivalent of an MBA, and obtained a position in the general management program of a management firm.

The Tax Court, in Will M. McEuen III wt. ux. v. Commissioner, T.C. Summary Opinion 2004-107, found that-

* The taxpayer enrolled in the degree program to meet the minimum education requirement for an associate in the investment banking industry; and

* The degree qualified for a new trade or business because the education allowed the taxpayer to perform significantly different tasks than those performed prior to enrollment in the program.

The cost of the degree was not deductible.

As is often the case in tax law, the "deductibility" of an MBA degree depends on the "facts and circumstances" of the individual situation.

If you cannot deduct the cost of acquiring an MBA as a business expense, all is not lost. You may be able to claim a deduction or credit for a part of the tuition and fees elsewhere on the return. But that is the topic for another article.

Robert Flach is a tax professional with 34 tax seasons of experience preparing 1040s for individuals in all walks of life. He writes THE WANDERING TAX PRO weblog (http://rdftaxpro.tripod.com/weblog), the NJ TAX PRACTICE BLOG (http://rdftaxpro.tripod.com/newjerseytaxpractitionernetwork), and the tax planning and preparation website http://www.robertdflach.net, which provides a wealth of tax advice and information. He also writes and publishes THE FLACH REPORT, a quarterly tax newsletter. The above article is from the Winter 2005 issue of THE FLACH REPORT.

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