On occasion, I am asked if a taxpayer can deduct the costs of graduate education. I consulted with a client about deducting the costs of his MBA as recently as a month ago. I confidently tell my inquirer that, in the vast majority of cases, if the costs were deductible, the costs would be treated as an employment expense and deducted as a Schedule A miscellaneous deduction subject to a floor of 2% of adjusted gross income. Beyond that advice, the deductibility gets a bit murky, particularly with respect to an MBA.
Issued in 1958, Regulation Section 1.162-5 addresses the deductibility of educational expenses. Basically, the regulations say that if the education is (a) a prerequisite for a specific profession or (b) required to meet the educational requirements for qualification in his or her employment, the costs are not deductible. Costs such as continuing education requirements are deductible.
So, the costs of becoming a lawyer or doctor or a physician’s assistant are clearly not deductible: you get a license to practice a profession after you complete your studies and pass an examination (or two or three). An MBA is different. Generally, an MBA does not bestow upon you a license. It may or may not qualify you for a new job; it could just make you better at your existing job. Pursuing an MBA may cause one to take a break in employment, if one elects to enter a full-time MBA program. This break in employment, along with other variations on the MBA theme, muddies the deductibility of MBA costs.
Derek A. Jones, an attorney in Orono, Maine, and Steven C. Colburn, an associate professor of accounting at the University of Maine in Orono, published an article about this topic in the July 2017 issue of Practical Tax Strategies/Taxation for Accountants. They examine carefully the development of the case law about the subject and lay out a clear explanation and guidelines for determining the deductibility of MBA costs. They look at different kinds of MBA pursuits. They even summarize their findings in a decision tree-type chart. Kudos, gentlemen!
I paraphrase key aspects of the summary of the findings set forth by Jones and Colburn. I am responsible for any faults in the paraphrase. Their summary addresses how a taxpayer can best position to deduct the MBA costs, based on the regulations and court cases.
- Before seeking an MBA, work for at least two years in a field of business to which an MBA can be applied.
- If possible, pursue the MBA part-time. If you must study full-time, don’t take off more than two years.
- After getting your MBA, work for the same employer in the same field. While not as convincing a case, if you don’t work for the same employer, work in the same field.
- As much as possible in the MBA program, take courses that pertain to the type of employment you had before and after the MBA.
- Don’t take a job after getting your MBA that requires an MBA.
- Don’t obtain a degree that may qualify you for a professional certification (such as a CPA), whether or not you pursue that profession certification.
I’ll be asked again about the deductibility of MBA costs, I am sure. Until authoritative pronouncements change the landscape, I will simply refer the questioner to this fine scholarship by Mr. Jones and Dr. Colburn.