Current deductibility of training costs.

• Author: Conjura, Carol

The IRS recently determined in Rev. Rul. 96-62 that the Supreme Court's decision in INDOPCO, Inc., 503 US 79 (1992), does not affect the treatment of training costs as business expenses, which are generally deductible under Sec. 162. In INDOPCO, the Court concluded that certain legal and professional fees incurred by a target corporation to facilitate a friendly merger created significant long-term benefits for the taxpayer and, therefore, were capital expenditures. The INDOPCO decision has been frequently cited by examining agents challenging the treatment of many different categories of expenditures historically regarded as currently deductible.

In Rev. Rul. 96-62, the Service held that amounts paid or incurred for training, including the costs of trainers and routine updates of training materials, are generally deductible as business expenses under Sec. 162, even though they may produce some future benefit. Rather than setting a new standard for deductibility, Rev. Rul. 96-62 clarifies that applying the INDOPCO decision to require capitalization of training costs would be inappropriate. Prior to INDOPCO, the courts and the IRS consistently agreed that the costs of various types of training were currently deductible as business expenses. For instance, the costs of training employees to operate new equipment in an existing business were held to be currently deductible in Cleveland Electric Illuminating Co., 7 Cl. Ct. 220 (1985). Similarly, the costs of training new employees to keep an assembled workforce unchanged were currently deductible, according to Ithaca Industries, Inc., 97 TC 253 (1991), aff'd, 17 F3d 684 (4th Cir. 1994), cert. denied. In Rev. Rul. 58-238, the Service stated that the costs of training employees that relate to the regular conduct of the employer's business are currently deductible.

The types of training costs that may be currently deductible include internal and external costs associated with routine employee training to maintain the skills of the workforce, and special training such as that associated with the implementation of new software programs, quality improvement programs to meet ISO 9000 quality standards, and similar programs designed to improve the production process or the operation of an existing business.

Expansion-Related Training

Costs incurred in starting a new business generally need to be capitalized, but training costs need not be capitalized merely because they are associated with a business...