With tax day in the U.S. fast approaching, the idea of finding deductions to reduce the amount you end up owing to the IRS becomes a national pastime. So what about the tens of thousands of dollars in tuition fees that MBA students fork out to develop their business skills? Even before you begin courses on accounting and tax efficiency investing strategies, the idea of passing off your MBA as a business expense seems too good to be true.
Well it probably is.
While the governments of Canada, Germany and France are among those encouraging their citizens to study by providing tax credits and deductions, things in the US are a lot more complex. Four years ago a Maryland nurse gave hope to tens of thousands of MBA students when she won her battle with the IRS to deduct nearly $15,000 in business school tuition. Fighting her case without the help of a lawyer, Lori Singleton-Clarke withstood the pressure of Uncle Sam’s auditors by presenting a meticulously well-documented case at the Tax Court. Encouraged by the complex diagram in IRS Publication 970, she argued that her tuition deduction met the narrow definitions of the law to improve or enhance the skills necessary for her job.
More recently however, Tax Court Judge Kathleen Corrigan ruled against Adam Hart, a Rollins College MBA who had claimed a $17,138 deduction for his 2009 tuition costs. In her ruling, Judge Kerrigan pointed to the fact that Hart’s employers did not require him to enroll in an MBA program, and that he was not consistently ‘carrying on a trade or business’.
It’s all quite a carry on. So where does that leave you on tax day?
The world of tax is filled with grey areas – which is perhaps why accountants are amongst the most creative people in the world. And because my own knowledge of the tax system is closer to the begrudging contribution of John Lennon for The Beatles song ‘Taxman’, you may want to consider getting a professional opinion. But for now, let us start with some general information about MBA tax considerations in the US.
First, tuition is deductible when it pays for an education that improves or enhances the skills necessary for your job or business, and/or the MBA is a requirement requested by your employer or regulations. The catch: It can be difficult to argue that you have to do an MBA (and grad school in general) to be able to do your job.
Second, the education must be related to a trade or business which you are ‘carrying on’, namely that you have already had several “consistent” years of experience before starting the program, and then plan to return to a career where you will continue to use the improved or enhanced skills in your post-MBA employment position (it is acceptable to change industries and employers but you must demonstrate the above).
Third, 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.
If you do meet these requirements, hooray! Tuition expenses, textbooks and case materials, computers, and other supplies paid in the tax year (in the year paid) are deductible if they exceed 2% of your gross income. In addition, loans you take out to pay for your tuition can be deducted in the year these funds are credited to the MBA program – not when the loans are later repaid to the lender. But student loan deductions are only applicable if you are earning less than $75,000.
The gray area is how can you really tell if someone is starting a new career or advancing a current one? And how long do you need to be working beforehand? A high school teacher becoming an investment banker won’t qualify because the two roles are so different, but the banker who returns to banking stands a better chance.
If you are a project manager with only two years’ experience, the IRS may consider this as insufficient work experience and that the education was not mandated by the employer. There does not seem to be a distinct answer on just how many years defines ‘several consistent years’. Somehow you have to convince the IRS that you had an established career path before pursuing your MBA.
Meanwhile someone with their own company who plans to return to run the company can make a stronger case, and just needs to inform the school who should be invoiced – the company or them personally.
So before you get your hopes up, get informed. Because many people pursue an MBA to try to change jobs and try new industries upon graduation, they are immediately disqualified from a deduction.
So the question remains: claim or not claim? Whatever your final decision, bear in mind that with or without a tax deduction the costs of an MBA and associated living expenses quickly add up. So careful advance planning is essential.
Irina Schneider-Maunoury, Assistant Director of Financing at INSEAD says “Should tax credits not apply to you, there are other ways to reduce your costs such as applying for scholarships, sharing accommodations with other students, living close to campus so you can walk or bike instead of using/leasing a car, and for those programs that offer internships, this is your opportunity to help pay for a portion of your tuition.”
The other key piece of advice is to adjust your mindset and lifestyle to reflect your return to school. The MBA attracts people who have typically worked for three or four years compared to other graduate school students, so they have grown used to having a monthly salary. As Nathan Franklin, the former Director of Wharton MBA Financial Aid says, “If you live like a professional when you are a student, you’ll end up living like a student when you are a professional again”.
You might want to also put your business school studies to good use, and pay extra attention during your classes on accounting and tax efficiency investing strategies.
Don’t ask me what you’ll want it for, if you don’t want to pay some more.