Taxing Issues: Are MBA Expenses Tax Deductible?

by Lewis A. Weinstein
Founder and CEO of GenerationTax

Deductible Requirements:
Section 162(a) of the Internal Revenue Code states: “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”. Deducting education expenses falls under Section 1.162-5 of the IRC and can provide you with significant tax savings if you qualify. First, the education must be related to a trade or business which you are “carrying on.” Secondly, the education must not be a minimum educational requirement for qualification in your trade or business, nor can it qualify you for a new trade or business. Finally, the education must maintain or improve skills needed in your profession.

The Gray Areas:
Concern 1: Am I “carrying on” (required answer: yes)? Attending graduate school full time generally precludes being actively involved in a trade or business. However, this is not, in and of itself, fatal. Assuming that you were engaged in a trade or business before coming to school (nowhere explicitly defined by the IRS, but significant work experience like that of most MBAs would generally qualify), a temporary leave of absence or other suspension of involvement in a trade or business is allowable. The IRS defines “temporary” as less than one year, but the courts have allowed for substantially longer absences (up to several years.)

Concern 2: Is the education needed to meet the minimum educational requirement of your trade or business (required answer: no)? The minimum education necessary in your profession must be determined from a consideration of such factors as the requirements of your employer, the applicable law and regulations, and the standards of your profession. This disallowance criteria is generally not applicable to many MBAs pursuing graduate study in business, since their undergraduate degree has typically satisfied the minimum entry requirements in their profession and of their employers.

Concern 3: Is the education part of a study program that can qualify you in a new trade or business (required answer: no)? The question of whether or not your education expenses can qualify you in a new trade of business requires a commonsense approach. You must analyze your work experience and the skills, tasks and activities you were qualified to perform before the education in comparison to those you were qualified to perform afterward. You will generally meet this criteria if you had substantial work experience and your MBA courses were directly related to, and built upon your skills required in your profession both before and after business school. It is acceptable to change industries and employers when you graduate. However, you must be able to demonstrate that your MBA maintained and improved your skills required in your position prior to business school and that you continued to use those same skills required in the position you took when you matriculated. Furthermore, many MBA classes are general in nature and are applicable to a wide range of business tasks and problems. Even more specialized classes i.e. a corporate tax class, should be valuable to most MBAs, but without qualifying them for a new trade or business.

Concern 4: Does an MBA maintain or improve skills required doing your present work (required answer: yes)? The case law on this issue varies, but it is clear that the more business-like your old career and duties, the more likely you will be considered to be maintaining or improving skills.

The proper application of the IRS rules for deducting qualified MBA expenses is frequently uncertain. Each person must analyze their specific circumstances in evaluating whether or not they qualify to take a tax deduction for graduate school. If you have questions with respect to your personal situation, I would strongly recommend that you utilize the services of a qualified tax professional.

IRS Rules for Determining Eligibility

Deductible Educational Expenses

Qualified education expenses paid in the tax year are deductible to the extent they exceed 2% of your adjusted gross income and you are itemizing your deductions. You can take out loans to pay for tuition expenses and deduct it in the year the funds are credited to the University (not when the loans are later repaid to the lender). Deductible education expenses include:

It does matter when you pay your tuition. You can only deduct MBA tuition expenses in the year paid. If you are a first year MBA, it may make sense to prepay a portion of your second semester tuition in the year you start business school to off-set your higher income. However, be aware of the dreaded Alternative Minimum Tax.

The Upside & Downside to Deducting MBA Expenses

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MBA 2017
Harvard Business School

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MBA 2015
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Lewis Weinstein speaking at the Harvard Business School