Deducting employee MBA expenses.

• Author: Medina, Joseph
• Position: Master of Business Administration

The deductibility of the cost of a Master of Business Administration (MBA) degree under Sec. 162(a) as a trade or business expense for an employee is a complex subject, with several factors to consider. The costs of an MBA are generally deductible if the degree maintains or improves skills required by the individual's employment or trade or business or meets the express requirements of the individual's employer or the requirements of applicable law. (1)

If the MBA will qualify the employee for a new trade or business or is required to meet the minimum education requirements for qualification in the individual's employment or other trade or business, its costs are generally not deductible. (2) However, the determination is fact intensive and depends in part on what the tax-payer did before, during, and after pursuing the degree.

Is an Established Trade or Business Being Carried on While the MBA Expenses Are Incurred?

For an employee to take a deduction under Sec. 162(a), a trade or business must have previously been established. In Primuth, (3) the tax court established that performing services as an employee is a trade or business for Sec. 162(a) purposes. To be in the business of being an employee for purposes of deducting educational expenses, an individual needs to have started his or her employment before pursuing a degree. The amount of time necessary to establish a trade or business as an employee is subjective, and no set standard has been established.

In Sherman, (4) the Tax Court held that a business manager with two years' experience as a manager in the Army before he attended Harvard to earn his MBA had established he was carrying on a trade or business; however, in Wassenaar, (5) the Tax Court held that a student who had a clerkship in the summer before he graduated from law school and was also pursuing a Master of Law in Taxation had not established a trade or business before pursuing the advanced law degree. As these cases suggest, MBA students must analyze their employment history to determine if they have established a trade or business.

It is clear that individuals are carrying on a trade or business of being an employee if they continue their employment while completing an MBA program. However, are individuals carrying on a trade or business if they end their employment, pursue their MBA, and resume employment after completing their MBA studies?

In Furner, (6) the Seventh Circuit held that a high school teacher's graduate school expenses were deductible, even though she took a year off from teaching to pursue her studies full time and was not on a leave of absence (her school did not grant leaves of absence). In response to Furner, the IRS issued Rev. Rul. 68-591, (7) which states: "Ordinarily, a suspension for a period of a year or less, after which the taxpayer resumes the same employment or trade or...