Is your MBA tax deductible?

More and more people are going back to school to pursue the MBA in order to increase their chance of keeping their jobs, getting a job, or getting a promotion. The increase of online MBA programs in recent years has also played a big factor in the rise of the number of MBA students because online MBA programs offer greater flexibility that would work with students' work and personal schedules. The cost of an MBA program can range anywhere from $10,000 to $100,000+ per year.

Can you deduct educational expenses such as MBA tuition?

It depends on many different factors. What applies to one person might not be the case for the next. This is especially true when it comes to educational expenses. Some educational expenses such as tuition qualify for American Opportunity Credit, Lifetime Learning Credit, and the Tuition and Fees Deduction while transportation costs or room and board are not. Sometimes mixing and matching different education expenses with different credits and deductions will give the best result. Working with a CPA tax practitioner can help you get the best tax return.

MBA tuition may also qualify as a work-related educational expense.

In some situations, education expenses, including travel to and back from school, might be deductible as unreimbursed business-related expenses in the Schedule A - Itemized Deduction. In order for work-related education expenses to qualify as business expenses, this education must meet one of the following two tests:

1) Maintenance or improvement of skills

In order to be deductible, the expense must be for education that maintains or improves the taxpayer's skills or that meets legal or employer's requirements for the taxpayer to maintain his or her current employment. For example, courses that a tax professional take in order to keep up with the changes in tax laws would qualify.

2) New Trade or Business or Minimal Educational Requirements

If the education qualifies the taxpayer for a new trade or business or if the education is the minimum educational requirement for the job, then those expenses are not deductible. For example, if you are an accountant and you go to law school to become a lawyer, these expenses would not be deductible.

Whether or not an MBA qualifies a taxpayer for a new trade or business has been in hot debate in recent years but the positive news is that tax courts have been ruling in favor of taxpayers to allow the deduction.  For example in Allemeier v. Commissioner (T.C. Memo. 2005-27), the taxpayer involved in the case was permitted to deduct his MBA tuition and related travel expenses as business expenses because the MBA "enhanced and maintained skills he already used in his job." Before the MBA, the taxpayer job was involved in finance, management, and marketing and he continued to be involved in those responsibilities despite a promotion.

A more recent example is the summary opinion Kopaigora v. Commissioner (TC Summary Opinion 2016-35). While a summary opinion holds no precedents with any other courts, judges do take these into consideration before making their decision. The taxpayer in this case was an accounting manager before embarking on his MBA and soon after the program, he found a full-time employment as a Vice President of Finance. Taxpayer contested that he was "established in the business of corporate finance and management before commencing his pursuit of an EMBA degree" and continued to perform duties that were substantially similar to his previous employment. The court agreed with the taxpayer and allowed the deduction.

CAVEAT: If you are choosing to take this deduction as business expenses, be prepared to defend your position. A deduction this size would definitely cause red flags with the IRS and they would be likely to ask for support. You must be able to substantiate all costs and to provide a direct relationship between these expenses, your employment, and the aforementioned requirements.


Journal of Accountancy

IRS Publication 12