Is Your MBA Tax Deductible? (featured in Forbes, April 11, 2014)
When it’s tax time in the US, the idea of finding deductions to reduce the amount you end up owing to the IRS becomes a national pastime. So what about the tuition fees amounting to tens of thousands of dollars that MBA students fork out to develop their business skills? Even before you begin courses on accounting and tax efficiency investing strategies, the idea of passing off your MBA as a business expense seems too good to be true.
Well it probably is.
While the governments of Canada, Germany, and France are among those encouraging their citizens to study by providing tax credits and deductions, things in the US are a lot more complicated.
First, tuition is deductible when it pays for an education that improves or enhances the skills necessary for your job or business, and/or the MBA is a requirement requested by your employer or regulations. The catch: It can be difficult to argue that you need an MBA (and grad school in general) to be able to do your job.
Second, the education must be associated to a trade or business which you are “carrying on”, namely that you’ve already had several “consistent” years of experience before starting the program, and then plan to return to a career where you’ll continue to use the improved or enhanced skills in your post-MBA employment position (it’s ok to change industries and employers but you must demonstrate the above).
Third, the education must not be a minimum educational requirement for qualification in your trade or business, nor can it qualify you for a new trade or business.
If you do meet these requirements, hooray! Tuition expenses, textbooks and case materials, computers, and other supplies paid in the tax year (in the year paid) are deductible if they exceed 2% of your gross income. In addition, loans you take out to pay for your tuition can be deducted in the year these funds are credited to the MBA program – not when the loans are later repaid to the lender. But student loan deductions are only applicable if you are earning less than $75,000.
The gray area is how can you really tell if someone is beginning a new career or enhancing a current one? And how long do you need to be working beforehand? A high school teacher becoming an investment banker won’t qualify because the differences between the two roles are so vast, but the banker who returns to banking has a better shot.
If you’re a project manager with only two years’ experience, the IRS may consider this not enough work experience and that the education was not required by the employer. There doesn’t seem to be a distinct answer on just how many years defines “several consistent years”. Somehow you have to persuade the IRS that you had an established career path before pursuing your MBA.
Meanwhile an entrepreneur who plans to return to run their company can make a stronger case, and just needs to inform the school who should be invoiced – the company or them personally.