According to the Wall Street Journal, a recent tax court overruling of the Internal Revenue Service (IRS) marks “a big win for all MBA students”, in a decision that “should embolden more students enrolled in MBA programs across the country to deduct their tuition — especially if they are getting an executive MBA.” But Samuel Handwerger, an accounting professor at the University of Maryland’s Robert H. Smith School of Business, doesn’t necessarily agree with the Journal’s sentiment.
You can read more about Kopaigora’s story via Forbes here, but the gist is that the IRS denied Alex Kopaigora $18,879 tuition deduction that would have saved him $2,111 in taxes, determining that he lost his job as a hotel manager while pursuing an executive MBA degree that prepared him for a different line of work as a small business consultant. The court disagreed and ruled that the student’s job dismissal did not remove him from being in the trade of management and that his pre- and post-MBA work aligned sufficiently.
According to Handwerger, the case, Kopaigora v. Commissioner, “represents the latest in a history of cases where the IRS looks at the MBA with a jaundiced eye, but mostly loses in tax court, where judges tend to take a more liberal view of deductible education expenses than that of the IRS.”
Handwerger says,
“A key element here that bothered the IRS, and one that has bothered them on more than one occasion, was the temporary leave of absence from a job. For an expense to be deductible and not personal, one has to be in the ‘business.'” believes the IRS.”
According to Handwerger, the IRS has recognized “temporary absences” on two fronts: First, taxpayers return to the employer or trade for which the education was designed to help improve their skills. Secondly, the IRS has long considered a temporary absence to be defined as a period of one-year or less.
Handerwerger says he expects the IRS to remain stubborn:
“After a string of losses in this area, you would expect the IRS to give in, but given the history they will likely continue the battle,” Handwerger says. “Taxpayers deducting MBA costs should continue to anticipate being challenged by the IRS, on audit, looking to at least cherry pick courses they would accept as being deductible.”