There may be errors in spelling, grammar, and accuracy in this machine-generated transcript.
Jeremy Wells: We live in what's called the knowledge economy. Most of the economy in the US for quite a while now has been based on not the ability of people to produce things or [00:00:30] do things with their hands, but rather the value of what they're able to accomplish with their minds. So advising people, making recommendations, preparing written documents, the sorts of things that professionals and oftentimes licensed professionals do. But also beyond that, um, there are a lot of professions where the the mental work is what's really driving the value. So you can think about things in the financial or insurance [00:01:00] sectors. A lot of the American economy today is driven by what we might call knowledge work. A lot of that knowledge generation happens through the education system, and tax law provides some education related benefits. Most of these are rather limited, though a few of these you probably heard of qualified tuition programs, otherwise known as 529 plans. These come from IRC section 529. This is a way for [00:01:30] usually parents to invest in college funds that will help pay for their children to pay for their college expenses. Deductible interest on education loans. If you had to borrow student loans to pay for college, you know all about this. A portion of the interest that you pay may be tax deductible. In fact, it's an adjustment to gross income that comes from IRC section two. 21. There [00:02:00] are also a couple of credits for education expenses. The American Opportunity Credit and the Lifetime Learning credit are two of the most common ones.
Jeremy Wells: These are for post-secondary education expenses. So college expenses, college tuition that comes from IRC section 25 cap A like I said, these benefits can be rather limited though, but they generally apply to any taxpayers pursuing almost any kind of qualifying education. Again, [00:02:30] those education credits for college tuition, as long as you're attending a qualifying institution, then that you qualify for the credit to offset some of your tuition costs, or if your loans were for qualified education costs, then the interest paying back on those loans is deductible. And those 529 funds can be used for any qualifying institution as well. So it's possible for a broad range [00:03:00] of people to qualify for these tax benefits, but there are some pretty significant limitations on them. For example. 529 plans. The the growth and using the growth in those accounts to pay for college expenses is nontaxable. But federally, there's no tax deduction for investing in those. Some states do allow a tax deduction, [00:03:30] but even those are usually limited to the first three, four, $5,000 that's contributed into them each year. And every state is going to have different rules as far as, uh, those benefits go. And if you live in a state that doesn't have an income tax like my state of Florida, then you're not going to really see any benefit for investing into those 529 plans until the beneficiary of that plan is actually going to college, and then [00:04:00] they'll be able to pay their.
Jeremy Wells: Uh, some of their college expenses, some of those qualifying expenses, not everything, but some of those expenses. With those 529 plan funds, the deduction for student loan interest is limited based on your adjusted gross income. So if your income is above a certain amount then your deduction phases out. So we have these benefits but they're rather limited [00:04:30] I work with a lot of self-employed people. I work with a lot of business owners. So one of the things that they're constantly asking me is, can I pay for my own education and use my business to do that? Or some of them that have employees are asking if they can help their employees pay their education costs and use the business to do that. In the knowledge economy, education [00:05:00] can have a significant value for self-employed people, for business owners and their employees, to either help them maintain or even enhance their career prospects and their earning potential. So it's important, and we want to encourage that as much as possible. As business owners or as the advisors of business owners or self-employed people, we have to be very careful about how we do that. Employers can support their workers [00:05:30] education as a tax free benefit in two ways. And I'm going to talk about these two ways in this episode on work related education, and how we can make paying the costs of work related education deductible.
Jeremy Wells: Again, there are going to be some limitations here, but those limits on what qualifies as deductible education costs Cos once we have met those burdens, then we do have some more opportunities in order to [00:06:00] see a tax benefit from paying those education costs, as long as those costs qualify. The two ways that an employer, or in the case of a self-employed person, that individual can receive a tax free benefit in order to pay those education costs. The first way is what's called an educational assistance program that's covered under IRC section 127 or as a working condition [00:06:30] fringe benefit, and that's covered under IRC section 130 2J8. Now a working condition fringe benefit this. That label encompasses a lot of different kinds of fringe benefits that can be offered to employees. So we're going to talk about that. But really we're going to talk about that within the context of a self-employed person paying his or her her own education costs, and those costs that would qualify for a self-employed person would probably also qualify. [00:07:00] If a business were paying those costs for one of its employees. So for the purposes of this discussion, that's really the same thing. Now the self-employed person is going to just deduct those costs as part of their businesses normal deductions for workers, employees. Then there are some ways that we need to think about how we're going to structure this. And those are the two ways that I just mentioned, [00:07:30] either through the educational assistance program or as a working condition fringe.
Jeremy Wells: But really here I want to focus on for self-employed individuals, they have an opportunity if they do it right, in order to make their education part of their business operations. But as I said before, there are some limits around here as far as what qualifies. So it's also very easy for [00:08:00] them to get in trouble doing this. In other words, you might think that the education you need is an ordinary and necessary business expense for you. But oftentimes, and I'll go through some examples of this. The IRS and the Tax Court disagree. I'll talk about how that, uh, how those limits work on what qualifies for deductible education for self-employed people as well as employees. But first, [00:08:30] I want to talk about these education assistance programs. So an educational assistance program allows an employer to pay an exclude from that employee's annual compensation, up to $5,250 in educational assistance costs each year. This actually, uh, got in the news, got in the headlines a couple of years ago when this program [00:09:00] was, uh, expanded to include not just educational costs, but also student loan repayments. And I'll talk about that in a minute. The educational assistance program, it's a separate written plan by an employer for the exclusive benefit of her employees. What do I mean by a separate written plan? Employers are encouraged. We always encourage the the clients [00:09:30] that we work with that have employees to draft what's called an accountable plan.
Jeremy Wells: An accountable plan is a way that a business owner can reimburse their employees or provide upfront money to cover what would normally be a business expense. If you've ever worked for a company where you had to travel for work, or you needed to stop and get meals while you were conducting work, [00:10:00] this sort of thing. And you were reimbursed by your employer. You turned in your receipts and you were reimbursed by your employer. That's under what's called an accountable plan. And there are rules about how employers have to run and manage that plan, how they have to reimburse you, how you, as the employee, need to substantiate those costs to your employer. But that's what we mean when we talk about an accountable plan. Now we're specifically talking about education costs here, work related education costs. So when it comes [00:10:30] to an educational assistance program, this is going to be a separately written plan drafted by that employer. Now these plans the written plan, it doesn't have to be complicated, but it does need to explain to the employees what costs qualify, how they're going to be reimbursed or how those costs are going to be covered. And that information needs to be provided to employees up front. It pretty much needs to be announced to employees by that [00:11:00] employer. Now the rules here all are in the Internal Revenue Code section 127, as well as Treasury Regulation section 1.1 27.
Jeremy Wells: And there are two different parts here. There's 1.1 27 one and two. Most of the actual rules are discussed in part two of that Treasury regulation. Now this educational assistance program, it can cover a broad range of educational costs. [00:11:30] So for purposes of this code section, section 127 and this educational assistance program, the term education includes any form of instruction or training that improves or develops the capabilities of an individual. Education paid for or provided under a qualified program may be furnished directly by the employer, either alone or in conjunction with other employers, or through a third party such as an [00:12:00] educational institution. Education is not limited to courses that are job related or part of a degree program. That language comes from Treasury Regulation Section 1.1272 C4. This is interesting because the first part of this episode, we're going to focus on these educational assistance programs. And under these programs, this concept of education can be pretty broad. As I said, quoting directly from that regulation [00:12:30] that we're talking about, education that is not limited to courses that are job related or part of a degree program. In other words, if you want your employees to take courses that just make them better people. More productive. Happier. Fitness. Wellness, these kinds of concepts, as long as it's provided as education. And as long as it's provided as part of a program that meets [00:13:00] the rules that I'm about to talk about, then it's part of what you can offer through that plan, which makes it deductible for your business and not taxable income for your employees.
Jeremy Wells: Now, the the term employees here, as I'm using it within the context of section 127 here, these educational assistance programs, the term employee includes self-employed workers along with some others. So for purposes of this [00:13:30] kind of program, under section 127, the term employee includes retired, disabled or even laid off employees and present employees who are on leave, as well as self-employed individuals or what we might refer to as independent contractors. So again, we've got a broad definition here of what we mean by an employee. Really, we're talking about anyone who works with or for your company. So current employees, [00:14:00] previous prior employees who have been laid off uh, or are perhaps on leave or no longer on the payroll due to retiring or disability, and then also employees who are on leave, uh, usually because of service in the military or the armed forces. So you can provide this benefit to a lot of workers, both past, present, uh, and, um, even those [00:14:30] workers who might not be considered actual employees, such as independent contractors. That said, there are some limits when we're looking at key employees and owners, so the program can't discriminate in favor of highly compensated employees or their dependents, and this definition comes from IRC section 414. Q now this is in the part of the Internal Revenue Code that is talking about retirement plans.
Jeremy Wells: But within [00:15:00] the context of retirement plans is where we get a lot of the definitions of who counts as an employee, who counts as a worker that is eligible for benefits like a retirement plan. And so a lot of other code sections will reference the entirely other parts of the Internal Revenue Code, where we have these definitions that work for other parts of the Internal Revenue Code. So in this case section 127, for purposes of thinking about [00:15:30] who is a highly compensated employee, is going to reference this definition in section 414, which includes an employee that has a greater than 5% ownership stake in the business, whether that's in terms of stock in a corporation or membership interest, or units in an LLC or a partnership. Compensation in excess of an annual threshold that is adjusted [00:16:00] for inflation each year. In 2025, that amount is $160,000. So any employee that is making over $160,000 can still participate in the program, but the program can't discriminate in favor of these highly compensated employees. And then the third marker of highly compensated employee is that employee is in the top 20% of employees of the entire company, ranked by compensation. [00:16:30] So in other words, you have to make this program available not necessarily to all employees, but to most employees in such a way that it doesn't discriminate in favor of any of these highly compensated employees.
Jeremy Wells: Those employees that have a 5% or greater ownership interest, their compensation is over that annual threshold, which for 2025 is $160,000, or that they're in the top 20% of employees ranked by compensation. The idea here is you want to make this [00:17:00] benefit fairly available for most of your workers. Now, you can put limits on employees that will qualify based on, for example, a time that they've worked for the business. So you can set some limits and say that, uh, employees that haven't passed their grace period yet, uh, which for a lot of businesses might be the first 90 days or the first six months, for example. Once they're out of that grace period, then they start to qualify [00:17:30] for these sorts of benefits. But not until then. You could do rules like that because those won't discriminate against particular sets of employees. But in general, you want to make this program available to most of your employees. The other thing that can be problematic, especially for self-employed people or for businesses with just 1 or 2 employees, is that employees and owners that have a greater [00:18:00] than 5% ownership stake in the business, whether that's 5% of the stock in a corporation or 5% of the membership interest in an LLC, they can't claim more than 5% of the total amount paid by the program. So think about what this means. If you are self-employed and you want to use this program for yourself and you have other employees, you [00:18:30] as the as a more than 5% owner of that business, you cannot claim more than 5% of the benefits paid out by that program.
Jeremy Wells: That's usually not practical for most small businesses. When the owner sets this program up in order to benefit herself or her, usually spouse or dependents. And those are included as well with [00:19:00] the 5% owner. So, for example, if I'm running my own business and I have a couple of employees and I set up this program, then I can't use this program. If I am going to claim more than 5% of the total benefits paid out by this program, I can't claim any of those benefits. Again, that's usually not practical for a lot of small business owners if they're going to include themselves in the program. So [00:19:30] either what happens is they either don't do this program at all, and they do what I'm going to talk about in the latter part of this episode, or they just exclude themselves from the program. Now you can exclude yourself from this program. There's nothing wrong with that. You just can't exclude groups of employees. That makes it to where your program is now discriminating in favor of those highly compensated employees, um, or any sort of discriminating [00:20:00] against any sort of protected class or anything like that. These rules are all discussed in IRC section 127 B2 and then Treasury Regulation 1.1 20 72E uh, as well as 127 B3 and then 1.1 20 72F.
Jeremy Wells: If you're already offering benefits to your employees through what's called a cafeteria plan, [00:20:30] uh, the. This is explained in IRC section 125 A cafeteria plan is a way that employers can provide benefits to their employees, but in lieu of providing the actual benefit under a cafeteria plan, employees have the ability to choose to accept additional compensation instead. So, for example, if my company offers health insurance [00:21:00] under a section 125 cafeteria plan, then my employees can choose either to accept that health insurance coverage, or they can take more salary in exchange and then go buy their own health insurance. Now, in this case, under an educational assistance program that's not allowed, the employer can't offer alternative compensation. That would be includable in gross income in lieu of participating in the program. [00:21:30] That section 127 B4, if you do that, then it essentially makes the program and the benefits coming out of that program Includable, uh, in your employees income. So you don't want to do that. It's basically either the employee participates in the program or does not. Now, participating in the program doesn't necessarily mean that the employee has to go out and actually spend money. It's [00:22:00] just that the benefit they could get out of this program can't be considered in lieu of compensation, additional compensation that they could take in the form of, say, cash. So if the maximum benefit is $5,250, then your employees need to consider the potential for getting that $5,250 worth of covered educational costs into their compensation [00:22:30] package.
Jeremy Wells: They can't choose between that or taking cash instead. So what kind of cost can this program cover? Educational assistance for purposes of section 127 includes tuition and fees, books, supplies and equipment. And like I said earlier, student loan repayments. But only until the end of 2025. So after 2025, unless Congress changes the law that those educational systems [00:23:00] program costs can include student loan repayments. In fact, this became this was part of the Covid relief pandemic relief legislation. This became a somewhat popular aspect of this educational assistance program. In other words, employers could now pay their employee student loan payments, but up to that maximum amount, $5,250 [00:23:30] per year, which Depending on your income and how much your student loans are, may or may not be that much. Education costs do not include payments for tools or supplies that the employee can keep after completing the education. That's important to remember, especially when it comes to tools like software. If you can still use that software as a worker after you have [00:24:00] completed the education, after you've finished the course, or you've graduated from the program, then you now own that tool or that supplier, that bit of software, and you can benefit from that long after that education is done. So those costs can't be covered under this program. The program also can't cover meals, lodging or transportation, and it can't cover payment for any course or [00:24:30] education that involves sports, games or hobbies.
Jeremy Wells: Uh, if you think about a normal college curriculum, there's usually some sort of physical education component that's required. You have to take a few hours, uh, in some P.E. courses or maybe some general, uh, health and wellness courses, those sorts of things. If they involve sports, games or hobbies, those aren't going to be, uh, considered eligible for this program. Meals, lodging and transportation that's going to cut out any sort of transportation [00:25:00] to and from campus or your meal plan if you're staying on campus or your room and board, uh, and your, uh, dorm costs or apartment costs, any of those sorts of personal expenses, meals, lodging, transportation can't be covered by this program. So it's limited to just what you're actually paying directly to the university to take specific courses, the tuition and fees, the book supplies and equipment. And then up until the end of 2025, 25. Student [00:25:30] loan repayments. Employees must be able to substantiate these expenses for their employers. This comes from Treasury Regulation 1.1 272I. An employee has to be able to provide to her employer substantiation that it's reasonable to believe that payments or reimbursements made under the program constitute educational assistance within the meaning of IRC section 127. What [00:26:00] does this mean? Basically, you need to be able to convince your employer, provide documented proof to your employer that the cost that you're asking to be covered or reimbursed actually fit within the definition of qualifying educational assistance under this code section.
Jeremy Wells: So you're not taking reimbursements for courses that are, like I just mentioned, in those sports or hobbies. You're not asking for reimbursement of your room [00:26:30] and board or meals expenses. You're not asking for reimbursement of tools or supplies that you'll get to keep after the education is done. You need to be able to show your employer that the expenses you're being reimbursed for, or that your employee is paying for, qualify for the program. And another important rule to remember here is that employees can't get a double benefit. What do I mean by that. So the program is going to cover the costs of [00:27:00] these educational expenses. So imagine an employee is going to register at a university and sign up for some classes. The employer is going to reimburse the employee for the cost of registering and taking those classes. But if there's a reimbursement, then the employee still paid the university, which means that employee is probably going to get a 1098 T, which is the IRS form [00:27:30] that an educational institution issues to their students, showing them how much they paid in tuition in that tax year. So in this case, the employee was the one that paid those costs. So the employee would get that 1098 t from that educational institution, but the employer reimbursed the employee for those costs. It's entirely possible that that employee would then turn around [00:28:00] and report those educational costs on her tax return and claim an education credit, or perhaps a deduction, but probably in this case, a credit, the American opportunity credit, or the lifetime learning credit on her return that would, in effect, create a double benefit.
Jeremy Wells: She didn't actually pay those expenses. She got reimbursed by her employer for those expenses. But because the forms made it look like she paid those expenses. She's going to claim a [00:28:30] credit on her tax return that she shouldn't have under IRC section 127 C7. That's not allowed. Employees can't claim that. Double benefit if you are the employee in this case. If you're getting reimbursed, it's important to remember that if it's your name that is on the, uh, the that university or college's records as paying and your employer is reimbursing you, or [00:29:00] if you're preparing the return for an employee who is getting reimbursed. It's important that you ask those questions. So if you know that, for example, a client is currently working for an employer and they just went back to school and they're still keeping that job, it might be worth asking if the employer covered any of those costs or reimbursed any of those costs under an educational assistance program because you want to avoid double dipping there. So these programs [00:29:30] provide a simple way to provide this limited benefit. Again, we're talking about up to $5,250 annually of educational expenses, given the significant rising cost of education.
Jeremy Wells: That might not be that much of a benefit. That might be a fairly negligible benefit. You know, again, it depends on who the employee is, who the taxpayer is, $5,250. You might be looking at 1000 1200, $1,500 [00:30:00] worth of actual tax savings, which is not nothing. But depending on the size of the business, depending on how they're going to offer this benefit, it might be a little bit more hassle than it's actually worth. And again, it does not work for self-employed individuals who own their own business. They can't use their own business to provide this benefit, unless they have a lot of employees, such that the benefit they would get out of this represents [00:30:30] up to 5% of the total benefit paid out. So in that case, this doesn't really help self-employed people a whole lot, especially not those that don't have any employees. So what can they do? What can self-employed people do? What can business owners do now? Education costs may actually be deductible as a business expense directly. Irc section 162 A allows as a deduction all of the ordinary [00:31:00] and necessary expenses paid or incurred during the taxable year in carrying on any trade or business. If you are a business owner, or if you are a tax professional that works with business owners, that phrase ordinary and necessary expenses, that should be, uh, you should have that memorized. And the fact that that comes from IRC section 162 should also have that memorized.
Jeremy Wells: I actually won six. Section 162 is a critical section to know and understand. If [00:31:30] you're working with small business owners, uh, with small businesses, with independent contractors or self-employed people, this is where we get all of the rules as far as business deductions and what's deductible. In fact, the regulations around 162, uh, there there are a lot of them. Uh, there are well over a dozen. I want to say, um, there are some missing numbers in there, but the the actual, uh, number after the hyphen [00:32:00] goes up to, I believe, almost 20. So there's a lot of, uh, parts to the Treasury regulations for code section 162. And although IRC 162 doesn't specifically mention education, there is an entire part to the Treasury regulations for this section. It's 160 1.1 62 five that explicitly discusses work related education expenses. Now, an employer can cover any expenses [00:32:30] that would qualify under Treasury Regulation 1.1625 for her employees as part of a working condition fringe benefit. And that's from IRC section 132 J8. So like I said before, really, whether we're talking about the business owner or thinking about the business as an as, as a whole for the business owner, or we're talking about employees that are going to have their costs covered under this working condition, [00:33:00] fringe benefit. It's really the same set of rules here. Now, an employer or sole proprietor can deduct individual education costs if the education maintains or improves required skills, or meets legal or employment requirements to maintain his or her present salary, status or job.
Jeremy Wells: This is from that Treasury regulation 1.1625. A. Maintaining [00:33:30] or improving skills includes refresher courses or courses dealing with current developments in that trade or business. This generally includes professional continuing education, so if you are a licensed professional, your continuing education is made deductible under this Treasury regulation. Education to meet an employer's minimum requirements qualifies if the requirements are imposed for a bona fide [00:34:00] business purpose, that is, from that same regulation. 1.1625 see what do we mean by a bona fide business purpose? If the employer, for good reason, requires its employees to take some education And that education is not barred, which I'll explain here in a minute from being deductible then. And there is a good [00:34:30] business reason for requiring that education. Then it's also deductible. So for example, I'm a part owner of an accounting firm. I want my staff to be able to be good at spreadsheets. So and how spreadsheets work. So I might require my employees to sign up for some training in spreadsheets and how spreadsheet formulas work, for example, these sorts of things. I have a bona fide business [00:35:00] purpose for that. We use a lot of spreadsheets in my business, and my employees need to be able to effectively use those spreadsheets. There is a bona fide business purpose behind that. Now, whether that is, uh, barred as deductible or not, we'll talk about in a minute.
Jeremy Wells: I would argue that it isn't so. Therefore it's, um, it's perfectly deductible for my business to pay for my employees to take a either a refresher course, um, or maybe a fundamentals course [00:35:30] in how spreadsheets work. Travel can be deductible if the travel is directly related to the duties of the individual in employment or other trade or business. So the major portion of that business, though, needs to include activities directly maintaining or improving required skills. Let's say, for example, uh, I want to send [00:36:00] one of my employees who is a credentialed, uh, tax professional to a conference, uh, focusing on tax issues, tax matters, so that employee is going to travel to go to that conference, they're going to attend the conference and then they're going to return home. That would because the purpose of that travel is directly related to the individual's employment. And the major portion of that [00:36:30] travel includes activities directly related to maintaining or improving required skills. Then that travel would be deductible now if that employee engaged in any personal activities while traveling. So, for example, the conference was two days, but the employee left a day early and spent a whole day on that trip. Uh, just sightseeing, you know, enjoying, uh, personally enjoying that location. Then the business [00:37:00] has to allocate the expenses for that trip between the business portion and the personal portion, and only the expenses allocated to the business portion are actually deductible.
Jeremy Wells: Also for travel, the employee, and the business has to abide by the requirements of IRC section 162 A2 regarding the deductibility of those travel expenses, and then also IRC section 274 D regarding the substantiation [00:37:30] requirements for those travel expenses. So just because there's an education component to the travel, you still have to follow the rules of normal travel expenses being deductible and being substantiated. Now, I mentioned before that some education expenses are barred from being deductible. That's because in that Treasury regulation under 1.1 625B, there are two types of education that are explicitly discussed [00:38:00] as Nondeductible. There are two exceptions to deductible types of work related education costs. The first exception is when the the education meets necessary minimum educational requirements. Minimum requirements include those of an employer, applicable laws and regulations, and professional or business standards. I'll talk more about what all that means here in a minute. The second exception [00:38:30] is that the education will lead to qualifying an individual for a new trade or business. The logic here from the IRS and from the Department of Treasury, when they, uh, rewrote this Treasury regulation in the late 60s, was that these types of expenses that either meet necessary minimum educational requirements or that will lead to qualifying for a new trade or business, [00:39:00] are essentially personal or perhaps capital expenditures. But in either way, there is an inseparable aggregate of personal and capital Expenditures. In other words, you're investing in yourself.
Jeremy Wells: And this is often the argument we hear in favor of education, right? That you're investing in yourself. You're investing in your own abilities. You're investing in your own knowledge, your own capabilities. And so therefore, uh, [00:39:30] these expenses are deemed personal and are not deductible as ordinary and necessary business expenses. Now, again. Education meets necessary minimum educational requirements. What does that necessarily mean? And then we'll lead to qualifying individual for a new trade or business. There is some explanation in the Treasury regulation of what these terms mean. There are even a few examples. But really what's happened [00:40:00] is the tax court has had to be the arbiter as far as what exactly qualifies, uh, as deductible education expenses and what therefore qualifies under 1.1 625B as Nondeductible. There are at least 100, if not more, tax court cases. If you consider the actual opinions and the memoranda opinion, the [00:40:30] memorandum opinions, as well as some summary opinions, there are well over 100 cases, uh, a lot of them coming in the late 60s and the late 1960s and the 1970s. Looking at, uh, what these terms actually mean for these two types of nondeductible education expenses. And there continue to be, uh, tax court cases on these. There are tax court cases as recent as within the last decade that are still looking at this question. In [00:41:00] order to deduct education expenses, the taxpayer has to be established in a trade or business before any expenses, including those for education, are deductible.
Jeremy Wells: This is a pretty, just blanket statement for business expenses in general, but it's important to keep this in mind specifically when it comes to these education expenses. So again, the education can't meet necessary minimum educational requirements, and it can't qualify the individual [00:41:30] for a new trade or business. If we think about this from the perspective of a business expense being deductible or not, if the business hasn't started yet, then those those expenses aren't deductible. Now they might be amortizable start up expenses, but they're not deductible. If the education is required to be able to work in that profession, or to qualify the individual to work in that trade or business, then the business can't have been started [00:42:00] yet. So the Tax Court has looked at this, that implicit in IRC section 162 and the related regulations, including 1.1625. The taxpayer has to be established in a trade or business before any of those expenses are deductible. So the question then is whether the taxpayer is established in that trade or business, and that the Tax Court has said is a question of fact, which is basically a way of saying that we have to look at that [00:42:30] individual taxpayer's case. We can't just make blanket statements. We can't draw lines in the sand as far as when we can tell, in any general case, when a trade or business has been, when a taxpayer has established in a trade or business.
Jeremy Wells: We can only base that determination on the facts of a specific case. However, one of the things that comes out of a particular tax [00:43:00] court case, this is link v Commissioner in 1988. Is that a relatively short or temporary tenure in a job before starting the education doesn't establish taxpayer in the trade or business. That job and that case in particular, the taxpayer, tried to claim that a summer job before starting a college program meant that that taxpayer was established in that trade or business. The tax court didn't agree with that. Holding a position doesn't [00:43:30] mean that a taxpayer has met the minimum educational requirements for qualification and employment. In other words, you can have a job. A lot of times that job is similar to the real job that the taxpayer is is aiming for. So, for example, um, a university teaching assistant has not met the minimum educational requirements for a permanent faculty position. There are a couple of court cases where the taxpayer has tried to deduct the costs of a PhD program, [00:44:00] because the taxpayer was already working as a teaching assistant in that graduate program. This is fairly common practice. Part of that doctoral education is getting some teaching experience or research experience as an assistant. Uh, and so these taxpayers, uh, the commissioner in 1970 and then Davis, the commissioner in 1976, they tried to claim that they were already established in the trade or business of higher education, even [00:44:30] while they were working on their PhD.
Jeremy Wells: The tax court said, you're not really you haven't met the minimum educational requirements for for employment at the university level until you're eligible to be a tenured professor, and that doesn't happen until you actually have your PhD. Law degrees generally qualify for a new trade or business, and that is that second exception, uh, that makes the education expenses nondeductible. [00:45:00] Law school applications tend to be a good indicator of an oncoming recession. Uh, when, uh, employees get laid off, a lot of them tend to sign up for law school or other graduate programs, um, when job prospects are bad, uh, then go back to school and try to beef up your skills or try to learn a new set of skills, uh, through law school, through graduate school. So even for taxpayers, [00:45:30] though that are already working in a field that requires legal research and analysis, it's still possible that law school qualifies that worker for a new trade or business. There are actually several, uh, tax court cases focusing on taxpayers that went to law school and tried to deduct the costs of their legal education because they saw it as advancing their prospects [00:46:00] within their current position, not necessarily qualifying them for a new trade or business. And in fact, several of these cases involved IRS employees, in particular IRS revenue agents. I think this is super interesting. Irs employees got caught trying to deduct the cost of their legal education and were basically told, you can't do that.
Jeremy Wells: Um, so even IRS employees get it wrong sometimes. Uh, but Wiseman v commissioner in 1969, uh, [00:46:30] was an individual who actually went to mining school and then became a patent trainee, uh, which is essentially a position that tries to, uh, research patents for, uh, mining technology. He went to law school to become a patent attorney, claimed that he was still doing similar enough work. The tax court disagreed. Nope. Now you're an attorney. You're no longer just a patent trainee. This is an entirely new trade or business. [00:47:00] The, uh, two two good cases, I think, to think, to review for IRS revenue agents that went to law school are. Weiler v commissioner of 1970 and then Taubman V commissioner of 1973. Like I said, a lot of these cases come out in the 60s and 70s. Uh, there was a lot of attempts by taxpayers to deduct these expenses. And it's funny, reading through these, uh, opinions, a lot of these cases don't involve relatively large amounts. They might have been 50 years ago. [00:47:30] Uh, but we're usually talking about hundreds, maybe a couple thousand dollars worth of tuition interest, uh, tuition fees, other kinds of costs like that. But, uh, these taxpayers thought that it was worth taking it to the Tax court to determine whether or not those costs were actually deductible in most of the time. The tax court sided with the IRS, saying that those expenses were not deductible.
Jeremy Wells: In fact, not only is getting a different degree usually a qualification, uh, to [00:48:00] enter a new trade or business, but even a license or certification within the taxpayer's current profession can qualify as a new trade or business. In Glenn v Commissioner in 1974, the IRS and the Tax Court agreed with the IRS, took the position that studying for and taking the CPA exam qualified the taxpayer, who at the time was a Tennessee Licensed Public Accountant, not a certified public accountant, but a licensed public accountant, qualified that individual for a [00:48:30] new trade or business. He even made the argument that his day to day work did not change as a result of getting that certification to be a CPA, and I can attest to that as well. When I got my CPA a few years ago, my day to day work didn't change that much. However, the tax court argued that becoming a CPA grants the holder of that license certain rights, responsibilities, privileges that weren't there before. Getting that CPA and so it's not so much whether your [00:49:00] day to day work Award changes, but whether that license or certification and the education that allows for that certification qualifies you for a new trade or business, and even just having a few additional capabilities that you didn't before completing that education or getting that certification means that you might be in a new trade or business.
Jeremy Wells: Another example is Robinson v Commissioner of 1982, and in this case, a licensed practical nurse completed [00:49:30] a nursing program and then qualified to be a registered nurse. And again, even though her day to day work didn't change substantially, her abilities as a registered nurse as opposed to a licensed practical nurse made it to where the Tax Court believed that she was in fact qualified for a new trade or business. Now, what gets really interesting is Masters of Business Administration MBAs. I've had clients that are in a certain profession and they go back to school to [00:50:00] get an MBA because they want to beef up their business acumen. Not because they want to qualify for a new trade or business. Not because they're trying to change careers, because they want to be better at their current job, which as business owners, their current job is split usually between being the technical expert that they are. I've had real estate agents go back and get their MBA. Um, I've had advertising agency owners go back and get their MBAs because [00:50:30] being a technical expert in a field doesn't necessarily make you qualified to own and operate a business in that profession. So just being good at handling real estate transactions as a real estate agent doesn't make you good at owning and running a real estate agency. So the question is whether an MBA actually qualifies that holder for a new trade or business. Now there are some cases. [00:51:00]
Jeremy Wells: This one is actually pretty split as far as the Tax court. Give you a couple examples here. Uh, in 2016, the Tax Court issued a summary opinion in Gora versus commissioner that said that a financial controller's continuing work in management and finance as a vice president of finance made the cost of an executive MBA deductible. In other words, that, uh, taxpayer did not his [00:51:30] his qualifications for the job that he had been doing and that he was doing after he finished his education, he wasn't qualified to do any new kinds of work as a result of that MBA. Therefore, it was the cost of that program was deductible. However, in Kray v Commissioner of 2017, just the following year, the Tax Court issued another summary opinion that said that a Computer Design Consultants [00:52:00] Executive MBA program qualified her to perform new tasks. She, even though she had managed some small teams as a computer design consultant, she really didn't have any tasks in her prior work that involved managing teams running a business. So in her case, actually getting that executive MBA qualified her to perform new [00:52:30] tasks in her business financial analysis, managing a business, managing and overseeing a staff. And so the cost of that executive MBA program were actually nondeductible. So an MBA may or may not qualify for, uh, qualify the the taxpayer for new trade or business and therefore may or may not be deductible. That one can be iffy.
Jeremy Wells: So be careful when deducting education costs. [00:53:00] Whether you're a taxpayer who's going back to school and looking to deduct those costs on your tax return, or whether you're preparing tax returns for for clients who are doing this. Employers and self-employed individuals really need to be careful, uh, when they're trying to deduct those work related education costs. In general, the tax court can be pretty strict about education, either meeting those minimum requirements for a profession or even more often than that, qualifying [00:53:30] the recipient of that education for a new trade or business. It's actually a relatively low hurdle to get across. And if there is, uh, as a result of that education, the qualification for a new trade or business, no matter how much the taxpayer says, my job didn't change, my title didn't change, I'm still doing the same stuff day to day. The IRS and Tax Court might still see that as qualification for a new trade [00:54:00] or business. So education that maintains or improves skills or expertise and is required to keep a credential, such as continuing education, is generally deductible. But education that could potentially qualify the taxpayer for a new career. And the keyword there is potentially it doesn't even have to actually qualify. Just potentially qualify the taxpayer for a new career trade or business probably is not deductible. So that's the the basics of work related [00:54:30] education and whether it can be deductible for the business, whether that can, uh, those expenses can be covered for employees or workers. And whether you, as a business owner can write off those education costs.