Taxing Issues: Are MBA Expenses Tax Deductible?

by Lewis A. Weinstein
Founder and CEO of GenerationTax

Deductible Requirements:
Deducting MBA expenses can provide you with significant tax savings. 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 required 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 an MBA a minimum educational requirement for my trade or business (required answer: no)? This disallowance criteria is generally not applicable to most MBAs pursuing graduate study in business, since their undergraduate degree will usually satisfy minimum entry requirements in most firms.

Concern 3: Is the education part of a study program that can qualify you in a new trade or business (required answer: no)? You are generally a good candidate to deduct your MBA expenses if you had strong business skills prior to business school. It’s acceptable to change industries and employers when you graduate. However, you must be able to demonstrate that your MBA maintained & improved your business skills and you’ll continue to use them in the position you take when you matriculate. Furthermore, many MBA classes are general in nature and are applicable to a wide range of management tasks and problems. Even more specialized classes i.e. a corporate tax class, should be valuable to most managers, but without qualifying them for a new trade or business. However, the language in the regulation and case law with respect to this limitation is so vague that it would be possible for the IRS to make such an assertion and very difficult for an individual to prove otherwise.

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 above rules for deducting 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 preparation firm.

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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Harvard Business School

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