Tax Court Ruling Allows Deduction On M.B.A.
Degree
By JANE J. KIM
Staff Reporter of THE WALL STREET JOURNAL
September 8, 2005; Page D2
Business-school students may soon have better luck
deducting their tuition expenses, thanks to a new tax-court
ruling.
People who pursue a master's degree in business
administration are allowed under Internal Revenue
Service rules to deduct as a business expense school-
related costs, which can exceed $40,000 a year at top-tier
institutions. But in recent years, the IRS has increasingly
challenged these deductions. A string of recent court
decisions have also ruled against taxpayers.
Now, there may be a glimmer of hope. Last week, the U.S.
Tax Court ruled in favor of one petitioner's ability to
deduct his M.B.A. expenses. Tax experts say the decision
could be used as a precedent for other courts and
taxpayers to follow. "After all we've seen in the past
couple of years, [this case] seems to swing the pendulum
back a little bit," says Robert Willens, a tax and
accounting expert at Lehman Brothers Holdings Inc.
Under Section 162 of the IRS code, taxpayers can deduct
educational costs as a business expense if the coursework
maintains or improves skills required in their current jobs
or if the education is required to keep their present salary,
status or job. If, however, the education qualifies the
taxpayer to work in a new career or if the coursework is
necessary as a minimum-education requirement for a job,
then such expenses aren't deductible. That is why doctors
and lawyers usually can't deduct their tuition costs -- they
need to graduate with degrees from medical and law
schools in order to work in those fields.
Write to Jane J. Kim at jane.kim@wsj.com
"While having the M.B.A. might help you get to a
position, there is no legal impediment to getting a job
without an M.B.A. as there would be for careers that have
licensing requirements," says Bob Scharin, editor of RIA's
"Practical Tax Strategies," a monthly journal for trade
professionals.
In the latest case, the court said the petitioner, Daniel
Allemeier, who had obtained an M.B.A. from Pepperdine
University while working at a dental-services company,
could deduct his tuition expenses because the "basic
nature" of what he was doing before and after his degree
didn't significantly change. In other cases in recent years,
the courts -- looking beyond the business the taxpayer
was already engaged in -- have denied the deduction
because the M.B.A. degree would have qualified the
taxpayer to work in a new job, regardless of whether he or
she went to work there or not.
The decision should give taxpayers more comfort with
deducting business-school expenses, especially if they
end up working in a job where they are using many of the
same skills that they were using before business school,
experts say. "The way I viewed it, this was a degree that
enhanced the skills I already had rather than train me for a
new skill," Mr. Allemeier says.
M.B.A. expenses, considered miscellaneous itemized
deductions, are deductible only to the extent that total
expenses exceed 2% of the taxpayer's adjusted gross
income. For those who qualify, the tax savings can be
significant.