A frequently litigated issue is whether expenses incurred by an individual to pursue a professional degree are deductible as a business expense under Code Sec. 162. Resolution of this issue depends upon a number of factors such as:
- Whether the education maintains skills required by the individual in his or her trade or business
- Whether the education satisfies the express requirements of the individual’s employers
- Whether the education satisfies requirements of law or regulations pertaining to the individual’s trade or business
- Whether the education was required so the taxpayer would satisfy the minimum educational requirements for qualification in a trade or business
An individual’s education expenses are deductible as ordinary and necessary trade or business expenses if the education satisfies either of the two following tests set forth in Reg. § 1.162-5(a):
- The education maintains or improves skills required by the individual in his or her trade or business.
- The education meets the express requirements of the individual’s employer or the requirements of applicable law or regulations imposed as a condition to the individual’s retention of an established employment relationship, status or rate of compensation.
Nondeductible education expenses are those incurred by an individual “for education which is required of him or her in order to satisfy the minimum educational requirements for qualification in his or her employment or other trade or business” [Reg. § 1.162-5(b)(2)]. The minimum education necessary to qualify for a position or other trade or business must be determined from a consideration of such factors as:
- The requirements of the employer
- Applicable law and regulations
- The standards of the profession, trade or business involved
The fact that an individual is already performing service in an employment status does not establish that he or she has met the minimum educational requirements for qualification in that employment. Once an individual has satisfied the minimum educational requirements for qualification in his or her employment or other trade or business (as in effect when he or she enters the employment or trade or business), he or she shall be treated as continuing to meet those requirements even though they may change [Reg. § 1.162-5(b)(2)(i)].
Qualification for New Trade or Business
An individual may not deduct education expenses that are part of a program of study that will lead to qualifying him or her in a new trade or business. In the case of an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work that is involved in the individual’s present employment.