DEDUCTING EMPLOYEE MBA EXPENSES by Karla Hopkins

The deductibility of the cost of a Master of Business Administration (MBA) degree as a trade or business expense for an employee is a complex subject with several factors to consider. The costs of an MBA are generally deductible if the degree maintains or improves skills required by the individual’s employment or trade or business or meets the express requirements of the individual’s employer or the requirements of applicable law.

If the MBA will qualify the employee for a new trade or business or is required to meet the minimum education requirements for qualification in the individual’s employment or other trade or business the costs are generally not deductible. However, the determination is fact intensive and depends in part on what the taxpayer did before, during, and after pursuing the degree.

To take a deduction the employee’s trade or business must have been previously established. An individual needs to have started their employment before pursuing a degree. The amount of time necessary to establish a trade or business is subjective and no set standard has been established.

It is clear that individuals are carrying on a trade or business of being an employee if they continue their employment while completing an MBA program. However, where a teacher took time off from employment to pursue a degree and then resumed her employment after, she was considered to have taken a temporary leave of employment and the costs were deductible. While a “one year or less” hiatus is a rule of thumb, it is not a statute but the longer the leave from employment, the more likely the IRS will determine that the individual has abandoned the former trade or business.

Assuming you are engaged in a trade or business, there are then three criteria that must also be met to determine that the costs are ordinary and necessary:

• The education is not required to meet the minimum requirements to qualify for the job.
• It is not part of a program that will qualify you for a new trade or business.
• The education either maintains or improves skills required by your employment or meets the express requirements of the employer.

Under the second item above, the regulations state that a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as the present employment.

On the other hand when an individual’s duties were technical in nature before enrolling in an MBA program and then managerial afterword, a tax court disallowed the MBA costs.

If you are able to fall into the first two categories above, there is one more hurdle. In item three above, there must be a business purpose for incurring the expense which includes it being required for your employment or your employer.

Because the analysis of this type of expense is very fact based, an individual should thoroughly analyze their current job, focusing on the education and skill requirements, and the courses being taken to determine whether they meet the IRS criteria for deductibility.