MBA: The Mother of All Tax Deductions?

Posted by: Louis Lavelle on April 10, 2009

By Anne VanderMey

Is MBA tuition tax-deductible? That’s the $15,000 question that’s been plaguing students, accountants, and the court system for years. It’s an important debate this year in particular, when students need all the breaks they can get.

There’s some good news from tax specialist Robert Willens , an adjunct professor of finance at the Columbia Business School, in his recent paper arguing that the deductions are legitimate. But there’s still a lot of room for case-by-case legal interpretation.

Of course, you should consult an accountant to see if you qualify, but here are some of the basic rules:

Your education is deductible but only insofar as it’s required for “carrying on” your current profession. So, if you’re a lawyer taking refresher legal courses, you’re probably in the clear. If you’re in marketing, getting an MBA to become an investment banker, you’ll run into trouble. School-related expenses should “maintain and improve” skills needed in your current field.

Furthermore, those expenses should be “ordinary and necessary” to your performance in your present job. It’s not enough that they’re simply beneficial. “As an accountant, I can’t go out and take a class in French cooking,” says Mary Wilson, a principal at CPA firm Rothstein Kass — even if clients love French food.

Your education also should not qualify you for a “new trade or business.” So, even if you think a culinary degree might further your accounting career, you won’t be able to deduct it because it qualifies you for a new position, in this case, French chef. This is a legal grey area for MBAs, because the degree is widely applicable to different trades.

Don’t be too deterred though, students have successfully made the case before.

Reader Comments

MBA Grad

April 14, 2009 8:17 AM

Having done this in 2 consecutive years for tuition + all expenses (books, travel, etc), I can confirm that is possible in Belgium which has similar rules to the USA. Being a part-time MBA student means you have the income to offset the deduction against. It works out to around a 40% refund in costs, huge! This is a huge economic incentive to go part-time rather than full-time.

Chuck

April 16, 2009 7:06 PM

The professor can argue as much as he wants, if you deduct your tuition and other school related cost, get ready for an IRS audit.

SD

April 16, 2009 9:16 PM

I have a friend graduated from a full time MBA program in the US and tried it last year. He got audited. Luckily he bought the H&R block audit protection and they covered the difference because they told him it was fine to deduct it

john

April 16, 2009 11:44 PM

so you don't take the deduction?

GG

April 17, 2009 12:38 PM

Is this debate applicable for Canadian MBA students as well?

ReadYourTaxCode

April 17, 2009 7:11 PM

BE WARNED!!!!

This is a complex issue that requires extensive research of the tax code before declaring your MBA as a business expense. Check the Allemeier decision that hinged on the general education vs. new trade argument. The core issue I found when I filed was that if the employer paid you any pre tax education expenses, then the business should have taken the deduction. My employer paid my tuition reimbursement as regular wages, fully taxed, and this allowed me to file my education expenses as an unreimbursed business expense. In addition (in the spirit of the Allemeier decision), my MBA was NOT a requirement for promotion (I have the same job and pay grade) and I did not move into a position where an MBA was required. The degree is enhancing my current job, so it meets the "maintain and improve" criteria.

Be VERY CAREFUL with this deduction. I ran this past a CPA and purchased audit protection because I know my case is very rare. Most businesses that reimburse employees for school give it back as pre tax dollars which can give you fits if you are looking to take the Hope or Lifetime credits.

Shveta

August 26, 2009 11:56 PM

I own a Private Fixtures company, and I have three college students working for me. They often ask me why dont I provide tuition reimbursement to them and I thought it would be an high expense. I know the benifits that employees might stay longer time with me and that I dont have to waite money and time on hiring new people but I was wondering if I provide Tuition Reimbursemtn to my employees will I get a Tax Break or some assistance from the government how does that work?

BW Editor Louis Lavelle

August 27, 2009 9:34 AM

That's a really good question, Shveta. Unfortunately it's one I don't know the answer to. Anybody out there familiar with corporate tax breaks for tuition reimbursement programs?

Louis Lavelle, Associate Editor, BusinessWeek

WM

October 21, 2009 11:37 AM

Louis,

Information on the deductibility and tax treatment of Employer provided educational assistance programs can be found in Publication 970 on the IRS website(www.irs.gov). There are certain rules you need to be aware depending if the assistance is more than $5,250 per year and whether or not it qualifies as a working condition fringe benefit which can be found in Publication 15-B.

To determine how these rules apply to you please consult your tax advisor -- To the extent this message contains tax advice it cannot be used by any taxpayer, for the purpose of avoiding any penalties that may be imposed under the Internal Revenue Code.

Joe

January 11, 2010 5:18 PM

BW's Louis Lavelle

January 11, 2010 6:30 PM

Joe, thanks for posting this...I somehow missed the tax court decision. For anyone who is interested, here's the link: http://www.ustaxcourt.gov/InOpHistoric/SINGLETON-CLARKE.SUM.WPD.pdf Kudos to the Wall Street Journal for finding out about this.

The upshot seems to be that the ruling, while not precedent setting, certainly clarifies who is and isn't eligible for the deduction. I think there are probably a lot of accountants who might advise MBA students to take the deduction based on this new case, and a lot more MBA students who will ultimately get it. But (as my accountant never tires of telling me) I'm no accountant. Would love to hear from one who's read the case....

Mary

January 11, 2010 11:35 PM

Can anyone find Publication 970 for 2009 on the IRS website? I looked at it in December and now when I go back to review it with the release of this article it seems to have been taken down...

rob

January 12, 2010 8:12 AM

how far back can we make the claim. i.e. I wasn't aware I could claim MBA tuition until the Nurse Case announcement...but I received my MBA 4 years ago. Can I go back that far to claim the deduction?

David S

January 12, 2010 10:46 AM

I started a PT MBA program in 09. I was always under the assumption that I would be able to deduct my tuition...this seems like such a gray area. I'm currently in sales management.
At UofM Ross (where I attend), you dont "major" in a specific discipline. You can choose to focus in an area, such as finance, by taking electives in that area. I do have every intention to leaving my current employer when I am done...and will most likely go into finance. But the degree will be a general MBA and a lot of the courses, especially in marketing, management and organizational studies, will have direct impact on improving myself in my current role.
Where do I stand with respect to taking a deduction?

Raghavendra K

January 13, 2010 11:21 AM

I am assuming the tax deduction doesn't apply to a full time MBA which led to a new career. Correct?

Very Interested in this one

January 14, 2010 8:42 AM

Here is the link to the publication. I read through most of it but it is squishy :) which gives it enough room to be argued...

http://www.irs.gov/pub/irs-pdf/p970.pdf

pg 64 is the interesting part - still would consult a tax advisor/attorney to be sure... looking into it myself and may seek to amend last years return as well - depending on the advice provided :)

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