Taxpayers Must Meet Strict Requirements for Continuing Education Expense Deductions

Key point. Continuing education expenses that are part of a program of study that will

Key point. Continuing education expenses that are part of a program of study that will lead to qualifying a taxpayer in a new trade or business are not deductible as a business expense even if the taxpayer did not intend to enter that trade or business.

The Tax Court denied a taxpayer's deduction for continuing education expenses because he failed to meet the strict requirements of the tax code. A physician claimed a business expense deduction on his tax return for flight lessons that would enable him to provide medical services to persons in remote areas. The IRS denied the deduction, and the taxpayer appealed. The Tax Court observed:

Section 162 [of the tax code] allows a deduction for all ordinary and necessary expenses paid in carrying on a trade or business. Section 162 does not explicitly provide for a deduction for continuing education expenses, but such expenses may be deductible under section 162 if they fall within its regulations. The regulations under section 162 allow a taxpayer to deduct expenditures for education if that education either (1) maintains or improves skills that are required by an individual in his employment, trade, or business or (2) meets express requirements set by the individual's employer or by a law or regulation as a condition of continued employment, status, or compensation. Education undertaken by an individual to meet minimum education requirements for qualification in his own or any other trade or business are not deductible.

The court noted that "in deciding whether the taxpayer's flying lessons are deductible education expenses under section 162, we need to determine whether the education expenses were incurred to maintain or improve his skills for use in his business or whether the education would qualify him to meet the minimum education requirements of some other trade or business."

The court cited previous decisions in which it held that if the education for which deductions are claimed qualify a taxpayer "to perform tasks and activities that are significantly different from those that he could perform before receiving the education, then the education qualifies the taxpayer for a new trade or business … . It is irrelevant whether this education actually leads to qualification in a new trade or business." The court concluded:

The taxpayer paid educational expenses for flight instruction. He testified that he intended to use these skills in his business. However, he failed to demonstrate that his flying lessons improved or maintained his skills as a doctor. The skills petitioner learned during the flying lessons were significantly different from the skills he already possessed. Consequently, the cost of his flying lessons are not deductible continuing education expenses under section 162. It is irrelevant that these lessons may have helped him reach patients in rural areas.

What This Means For Churches:

It is common for pastors to enroll in continuing education courses at local universities and seminaries, or through online courses. Can the costs of these educational opportunities be deducted as a business expense on a pastor's tax return? As the Tax Court noted, you may deduct expenses you incur for education, such as tuition, books, supplies, correspondence courses, and certain travel and transportation expenses, even though the education may lead to a degree, if the education (1) is required by your employer, or by law or regulation, to keep your salary, status, or job or (2) maintains or improves skills required in your present work.

However, you may not deduct expenses incurred for education, even if one or both of the above-mentioned requirements 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. You can deduct the costs of qualifying, work-related education as a business expense even if the education could lead to a degree.

Once you have met the minimum educational requirements for your job, your employer may require you to get more education. This additional education is qualifying work-related education if all three of the following requirements are met:

• it is required for you to keep your present salary, status, or job;

• the requirement serves a bona fide business purpose of your employer; and

• the education is not part of a program that will qualify you for a new trade or business.

If you get more education than your employer requires, the additional education can be qualifying work-related education only if it maintains or improves skills required in present work.

In a previous case, 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. The minister 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. He later earned a bachelor's degree in human services. On his tax return he claimed a deduction of $9,698 for "continuing education." The amount claimed represented tuition, books, and course-related fees incurred for the courses taken at the university.

The IRS disallowed the deduction, and the minister appealed. The Tax Court agreed that the educational expenses were not deductible. It 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.

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 had "repeatedly disallowed education expenses where the education qualified 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 court agreed that the courses the minister 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 concluded, "We conclude that the courses, which ultimately led to his 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 nonprofit 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" for taxpayers to establish that a bachelor's degree program does not qualify them for a new trade or business. Warren v. Commissioner, T.C. Memo. 2003-175 (2003). Holden v. Commissioner, T.C. Memo. 2015-83 (2015).

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