• Key point. Education expenses can be treated as a business expense if the education: (1) is required by your employer, or by law or regulation, or (2) maintains or improves skills required in your present work. However, education expenses cannot be treated as a business expense, even if one or both of the requirements mentioned above are met, if the education: (1) is required in order to meet the minimum educational requirements to qualify you in your trade or business, or (2) is part of a program of study that will lead to qualifying you in a new trade or business, even if you did not intend to enter that trade or business.
* The Tax Court ruled that a minister could not deduct the cost of courses he took at a local university to complete his undergraduate degree, even though he took the courses to enhance his ministerial skills. In 1986, George decided to pursue a career in the ministry of the United Methodist Church (UMC). In 1992, George became a “certified candidate.” This level requires graduation from an accredited high school or receipt of a certificate of equivalency. From 1993 to 1996, George was a part-time “local pastor.” A local pastor may be a student or a part-time or full-time position. This level requires attendance at a 2-week licensing school or completion of one-third of the work necessary for a master of divinity degree. Local pastors are appointed annually, and continue in the course of study for ordained ministry until they have completed the educational requirements for associate or probationary membership. After completion of the educational requirements for an associate membership, however, an individual may choose to remain a local pastor. A local pastor may lead the sacraments (i.e., baptism, communion) at the appointed parish.
Prior to entering the candidacy for ministry, George had accumulated over 60 undergraduate semester hours from various schools, which met the minimum undergraduate educational requirements to become an associate member. In 1994, he decided that he needed to improve his ministry skills, and so he enrolled in various courses at a local university (including Introduction to Counseling, Internship in Ministry Practice, Death and Dying as a Life Cycle, Modern Social Problems, The Family, Community, Ethics in Human Services, Symphonic Choir, Basic Writing, and Writing Strategies). These courses were not required for him to continue as a local pastor. In 1995, he earned a bachelor’s degree in human services.
On his 1994 tax return, George claimed a deduction of $9,698 for “Continuing Education” on Schedule C. The amount claimed represented tuition, books, and course-related fees incurred for the courses taken at the university. The IRS audited George’s 1994 tax return, and disallowed the deduction, stating: “Since you did not establish that the business expense shown on your tax return was paid or incurred during the taxable year and that the expense was ordinary and necessary to your business, we have disallowed the amount shown.” George appealed.
The United States Tax Court agreed with the IRS determination that George’s educational expenses were not deductible. The Court acknowledged that education expenses are deductible as business expenses if the education “maintains or improves skills required by the taxpayer in his employment or meets the express requirements of an employer imposed as a condition for the taxpayer’s continued employment.” However, education expenses are not deductible if they are “made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business.” This is so even if the courses meet the express requirements of the employer. It is “immaterial whether the individual undertaking the education intends to or does in fact become employed in a new trade or business.” Whether the education qualifies a taxpayer for a new trade or business depends upon the “tasks and activities which he was qualified to perform before the education and those which he is qualified to perform afterwards.” The Court noted that it has “repeatedly disallowed education expenses where the education qualifies the taxpayer to perform significantly different tasks and activities. Further, the taxpayer’s subjective purpose in pursuing the education is irrelevant, and the question of deductibility is not satisfied by a showing that the taxpayer did not in fact carry on or did not intend to carry on a new trade or business.”
The IRS argued that the courses George took qualified him for a new trade or business, and that the expenses of a college education are almost always nondeductible personal expenses. The Court agreed, “We conclude that the courses, which ultimately led to George’s bachelor’s degree, qualified him in a new trade or business. The courses provided him with a background in a variety of social issues that could have prepared him for employment with several public agencies and private non-profit organizations outside of the ministry. Whether or not he remains in the ministry is irrelevant; what is important under the regulations is that the degree ‘will lead’ him to qualify for a new trade or business.” The Court noted that it is “all but impossible” taxpayers to establish that a bachelor’s degree program does not qualify them for a new trade or business:
Millions of people must secure a general college education before they commence their life’s employment, and it is generally accepted that obtaining such education is a personal responsibility in preparing for one’s career. Though his perseverance is to be admired, we do not believe that he should receive tax deductions not available to those who complete their general college preparation before beginning their career. Furthermore, a general college education has more than economic utility. It broadens one’s understanding and increases his appreciation of his social and cultural environment. We have no doubt that the courses George took greatly improved his skills in being a pastor, and that he intends to continue with the UMC. Unfortunately, we apply an objective test in determining whether a course qualifies a taxpayer for a new trade or business, and the courses prepared him for positions outside the ministry. We conclude that he is not entitled to a deduction for his educational expenses because the courses qualified him in a new trade or business.
Application. This cases demonstrates that undergraduate courses taken by a minister in order to complete a college degree are not business expenses and so they cannot be deducted by the minister or reimbursed by the church under an accountable reimbursement arrangement. The fact that the courses are taken to enhance ministry skills is irrelevant. While the cost of courses that “maintain or improve” job skills may constitute a legitimate business expense, this is not so if the courses are part of a program of study that will qualify the minister for a new trade or business even if that trade or business is never pursued. As a result, undergraduate courses are almost never business expenses, as this case illustrates. Warren v. Commissioner, T.C. Memo. 2003-175 (2003).
© Copyright 2003 by Church Law & Tax Report. All rights reserved. This publication is designed to provide accurate and authoritative information in regard to the subject matter covered. It is provided with the understanding that the publisher is not engaged in rendering legal, accounting, or other professional service. If legal advice or other expert assistance is required, the services of a competent professional person should be sought. Church Law & Tax Report, PO Box 1098, Matthews, NC 28106. Reference Code: m27 c0503
