To Deduct, or Not To Deduct? IRS Wins Tuition-Deduction Case Against an MBA

The US Tax Court recently ruled that an MBA graduate at Rollins College in Florida improperly deducted his MBA tuition expenses from his 2009 tax return.

IRS Say What?

Adam Hart had received a 1098-T tuition statement, and he submitted the amount listed on the form as an itemized deduction for business expenses that had not been reimbursed. Hart now owes the IRS more than $2,500 in back taxes as a result of the ruling.

While the IRS does not usually challenge tuition deductions, it is important to consider the implications of this case. The favorable result for the IRS may encourage the organization to look at MBA tuition deductions with more scrutiny in the future.

A Little Background Please?

An individual can deduct tuition for an educational program when it provides expertise they need for an existing business or position, or if the courses are required by their employer. If a student is pursuing their MBA to change careers, they cannot deduct the cost of tuition. The rule seems simple, but the line between allowed and unallowed deductions is not clear. If a consultant attends business school to increase their career potential, can they claim they are getting the MBA to improve their skills for an established job?

Confused Yet?

In 2009, Adam Hart was employed by three different companies, but none of them required him to take MBA courses for his job. While Hart claimed that he was selling pharmaceuticals and his MBA classes helped him obtain employment, the IRS argued that he was not established in the business and his employers had not required him to enroll in the MBA program.

The rules are unclear, and making the wrong choice can be costly. What should potential MBA students know before they decide whether to deduct their tuition from their tax returns?

Businessweek recently published an article that provides advice for MBA students on whether or not to deduct tuition. First, the article observes that it is the taxpayers responsibility to show that their MBA is a “business expense” if an IRS auditor challenges the deduction. While the definition is not clear, the US Tax Court has previously ruled in favor of MBA students who claimed tuition deductions.

Consult a Tax Expert

In the article, a principal tax analyst from the Tax Institute notes that large deductions are more likely to draw the attention of IRS auditors. Finally, Businessweek recommends that students consult tax experts if they are unsure whether they can deduct their MBA from their taxes.