Small business owners are responsible for maintaining their own skills and qualifications and can also cover educational costs for their employees. Thankfully, education costs even for the business owner can be deducted on taxes, as long as a few criteria are met. Educational expenses can also provide an employee benefit that is not taxable to the employee but deducted for the business.
Generally the cost to train an employee to do their work is a deductible expense. However, the IRS is concerned with business owners classifying a personal educational expense as a business deduction, which is not permitted. So additional rules exist to determine if an owner can deduct their own education as a business expense.
The deductibility of work related education expenses is covered by IRS Topic No. 513. There are two steps and several other considerations to evaluate before you know if your educational expenses can be deducted. Although the IRS has an electronic interview tool to help make this determination, many education expenses can fall into a grey area.
The steps, tax court cases and factors below will help you make a determination and once you do, it’s wise to also discuss with your tax professional. The decision to take the deduction need not be solely up to your tax professional because if you are audited you are the one responsible for the additional tax. So ensure you are also comfortable taking the deduction.
Step 1
One of the following must be true for the educational cost incurred:
- The education or training maintains or improves skills needed in your present work, OR
- There is a legal requirement to obtain the education to keep your present salary or pay, status, position or license.
The key to this step is that the cost must relate to your present work or position. There has to be a connection to the work you are doing in your business now. An example of a legal requirement is continuing education required to maintain a professional license, without which the license cannot be renewed.
Step 2
Even if you make it past step one, neither of the following can be true as it relates to the educational expense:
- The education cannot be part of a program that will qualify you for a new trade or business. This means that if you will now be able to enter a new profession that you could not perform work in before, the expense cannot be deducted.
- The education cannot be needed to meet the minimal educational requirements of your present trade or business. This means it if the work requires a masters degree, as the minimum education required to enter the profession, the masters degree cannot be a business deduction.
The idea with this step is that the IRS expects you to pay