John R. Bullis: When education expenses are deductible

The Tax Court recently found another example of when educational expenses aren’t deductible.

An accountant tried to deduct his law school tuition and fees as ordinary business expenses. He may not have looked closely at IRS Code Section 162(a). That says the education expenses are deductible if they maintain or improve skills required in his business or work or if they meet the express requirements of his employer, or the requirements of the tax law or regulations or if the expenses are a condition to keep his salary, status or employment. Those expenses are deductible only if the taxpayer is in the trade or business at the time he pays or incurs the expenses.

It has clearly been established the educational expenses aren’t allowed if the education is needed to meet the minimum requirements of his present or intended job, trade, business or profession.

Also, there’s no deduction for education expenses to fulfill general education goals or for other personal reasons; or if the expenses are part of a program of study that leads to qualifying the individual in a new trade or business.

Mr. E. Santos prepared tax returns in 1990. He became an “enrolled agent” and was authorized to represent taxpayers before the IRS in 1995. He earned a master’s in taxation in 1996 and began doing financial planning. He attended law school in 2010 and paid $20,275 in tuition and fees. He became an attorney and started a law firm that provided tax and financial planning. This gentleman was a hard worker and achieved much!

The tax issue was whether he could deduct the law school tuition and fees. The Court said he failed to overturn the precedent the Ninth Circuit Court of Appeals (our circuit) established long ago.

The Tax Court found the regulation Mr. Santos claimed was not valid, was consistent with statutory law and wasn’t arbitrary. So the court determined the facts were he became qualified for a new profession and the education expenses weren’t deductible.

A change in duties was found to not be a new trade or business when the present job involved the same general work as the new position. So when a teacher changed from an elementary to high school, or from a teaching position to being a principal, the regulations say the educational expenses are deductible (Regulation l.162-5(b)(3).

If the educational expenses maintain or improve existing skills required in the current job or the expenses meet the clear requirements of the employer or laws or regulations and are for a bona fide business purpose and as a condition of keeping the present job, they’re deductible.

Did you hear? “If we are growing, we are always going to be out of our comfort zone,” by John Maxwell.

John Bullis is a certified public accountant, personal financial specialist and certified senior adviser who has served Carson City for 45 years. He is founder emeritus of Bullis and Company CPAs.