MBA Tax Deduction

In Singleton-Clarke v. Commission, the United States Tax Court decided, that in some circumstances, MBA tuition expenses can be deducted.  The keywords here are “in some circumstances.”  The Wall Street Journal published an article in January that suggested MBA students could unequivocally expense their tuition, which is at best, misguided information.  The Wall Street Journal failed to point out that the specific facts of each taxpayer’s case is what decides whether or not a taxpayer can deduct MBA tuition expenses.

Although this case does help substantiate a deduction for MBA expenses, taking the deduction highly increases the likelihood of audit.  Case law in tax court is not a primary rule of law like Internal Revenue Code and Treasury Rulings and cannot be, according to Section 7463(b) of the Internal Revenue Code, used as precedence for any other case.  However, regardless of Section 7463(b), this case does help substantiate such a deduction in some circumstances.  The problem is the IRS will likely audit a taxpayer who takes the deduction and the burden of proof is on the taxpayer.  That is, the IRS will ignore this case, audit the taxpayer, rule against her, and issue a tax liability.  And then it’s up to the taxpayer to file suit against the IRS and substantiate the deduction.

Here are things to consider:

Deductions are a matter of legislative grace, and taxpayers must satisfy the statutory requirements for claiming the deductions.

Taxpayers may deduct ordinary and necessary expenses that they pay in connection with operating a trade or business.

The taxpayer must not have the right to obtain reimbursement from his employer.

Education can be expensed if (1) It maintains or improves skills required by the individual in his employment or other trade or business, or (2) Meets the express requirements of the individual’s employer, or the requirements 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.

Now here’s the tricky part:

If the education qualifies the individual for a new trade or business then the education expenses are not deductible because the education is a personal expense or constitutes an accumulation of personal capital.

That is the crux of this case.  The Opinion states “the decisive factor generally is whether the taxpayer was already established in their trade or business.”  The court found that an MBA is a general degree and, although the education improved the taxpayer’s skill set, it did not necessarily qualify her for a new trade or business.  This taxpayer was already established in her field.  The Opinion clearly provides that if the taxpayer was not established in her trade, then she could not deduct the MBA expenses.  Therefore, if you are working at Wendy’s flipping burgers while getting your MBA and then take a management job with Google after graduation, you probably cannot use this case to substantiate the education deduction.  However, as in this case, the taxpayer was established in the field of nursing and the MBA degree helped her along her chosen career path, not a new trade or business.  And under these circumstances, the Court found that Ms. Singleton can expense her MBA expenses.

Disclaimer: Since such IRS determinations are highly fact-specific, the advice of a competent tax professional should be obtained before proceeding to claim such a deduction for tuition expenses.