Taxability of employer-provided educational assistance.

• Author: Cheney, E. Drew

Generally, anything of value, including payments of tuition and other educational assistance, that an employer provides to an employee is treated as taxable compensation to the employee. However, there are at least four distinct circumstances in which employer-provided educational assistance is nontaxable. These sets of circumstances differ from each other significantly but can overlap. The purpose of this item is to provide a brief overview of them.

Job-Related Education as a Working Condition Fringe Benefit

Sec. 132(a)(3) allows an employee to exclude working condition fringe benefits from gross income. A working condition fringe benefit is defined in Sec. 132(d) as "any property or services provided to an employee of the employer to the extent that, if the employee paid for such property or services, such payment would be allowed as a deduction under section 162 or 167."

Under Regs. Sec. 1.162-5, education expenses are deductible as ordinary and necessary business expenses if the education:

1. Maintains or improves skills required by the individual in his employment, or

2. Meets the express requirements of the individual's employer, or the requirements of applicable law or regulations, imposed as a condition to the individual's retaining an established employment relationship, status, or rate of compensation.

   However, education expenses are not deductible under either of the following circumstances:

1. They are required in order to meet the minimum educational requirements for qualification in the employee's employment or other trade or business; or

2. They are part of a program of study that will lead to the employees' qualifying for a new trade or business.

   Regs. Sec. 1.162-S has been in effect in substantially its current form since 1967, and there have been hundreds of cases and rulings on such issues as whether the education:

1. Is sufficiently directly connected with the student's current trade or business;

2. Qualifies the student for a new trade or business; or

3. Meets the criteria for being "ordinary and necessary," which includes a reasonableness requirement and a requirement that the expenditures not be lavish or extravagant.

   These determinations are very factspecific, and there are many instances where good arguments can be made on both sides of the question of whether the education meets the criteria. However, in other instances, the issue is wellsettled. For example, it is clear that regardless of the student's intent, education...