On line mba degree

LEONARD GOODMAN AND JAY SOLED SUGGEST HOW PROPER TAX PLANNING CAN EASE THE ECONOMIC BURDEN OF OBTAINING AN MBA.

A common feature of the business world is that taxpayers in record numbers are obtaining their master of business administration (MBA) degrees.1 While the costs associated with obtaining an MBA degree vary, they are often significant.2 Taxpayers sometime bear this expense; other times taxpayers' employers bear it.

Three factors differentiate MBA candidates from those taxpayers who pursue other professional career paths (eg., medicine, law or engineering). First, unlike other professional programs, admission to most MBA programs ordinarily is predicated upon the candidate having prior work experience. Second, MBA programs offer a curriculum that is more diverse in scope than other professional programs. (Indeed, many business schools specifically advertise that their MBA programs will help candidates in their professional career, be it medicine, law, engineering, etc.) Third, most MBA candidates matriculate on a part-time basis while working full-time elsewhere, making it more likely for them to draw a connection between their employment responsibilities and their course of business studies.

With these distinguishing factors in mind, this article analyzes tax issues regarding the payment of MBA tuition and related expenses. It sets forth a general overview of the tax treatment of educational and related expenses under the Internal Revenue Code (the "Code"). Next, it summarizes cases and administrative guidance that analyze whether a taxpayer may deduct the costs of obtaining an MBA degree (or, when the taxpayer's employer reimburses these costs or pays them directly, whether a taxpayer may exclude these reimbursements or payments from income). Third, the paper describes various tax incentives (eg., lifetime learning credit) that may be available to MBA candidates. This analysis then concludes by offering several taxplanning suggestions.

Deductibility of Educational Expenses

Code Sec. 162 determines the deductibility of educational expenses. As a preliminary matter, educational expenses are deductible only if a taxpayer carries on a trade or business.3 When taxpayers are gainfully employed and they simultaneously are conducting their course of studies on a part-time basis, this test is usually met.4 Conversely, when a taxpayer's course of studies is conducted on a full-time basis, and requires an absence from work, the "carrying on" test under Code Sec. 162 is more difficult to meet.5 The taxpayer must demonstrate engagement in trade or business, temporary work absence and an intention to return to that trade or business.6 If the cessation from employment is indefinite rather than temporary, the Code disallows a deduction.7

Aside from the general requirement that taxpayers carry on a trade or business, treasury regulations promulgated under Code Sec. 162 set forth specific guidelines governing the deductibility of educational expenses. Two categories of educational expenses that the regulations posit are deductible.

To MAINTAIN OR IMPROVE TAXPAYER'S SKILLS

One category of deductible educational expenses is those that maintain or improve a taxpayer's skills.8 For example, if a tax associate wants to improve his tax skills, he may attend a masters program in taxation. Even if this program leads to the taxpayer obtaining a degree (i.e., an LL.M. in taxation), the costs associated with obtaining the degree are deductible.9

To MEET AN EMPLOYER'S EMPLOYMENT REQUIREMENTS

Another category of deductible educational expenses is those that meet an employer's employment requirements.10 For example, suppose a state school board requires that all teachers periodically be certified. As part of the certification renewal process, teachers must either present evidence of college credits in professional or academic subjects earned during the life of the certificate or pass an examination on five books selected by the state's department of education. Under these circumstances, a taxpayer who opts to take college courses to satisfy her employer's employment requirements may deduct the costs she incurs in taking such courses.11

Not all educational expenses are deductible, however.12 Treasury regulations promulgated under Code Sec. 162 classify many educational expenses as nondeductible personal expenses. There are two categories of educational expenses that the treasury regulations posit that are nondeductible.

To MEET THE MINIMUM EDUCATIONAL REQUIREMENTS OF A PARTICULAR TRADE OR FIELD

One category of nondeductible educational expenses is those that satisfy the minimum educational standards that qualify a taxpayer for a position in a particular trade or field.13 A taxpayer cannot, for example, deduct the costs of obtaining a graduate degree if that is the requisite degree that will enable him to become a full-time faculty member at the university where he currently is employed as an instructor.14 This category is nondeductible because obtaining this degree is required to meet the minimum standard to become a full-time faculty member.

To QUALIFY TAXPAYER FOR A NEW TRADE OR BUSINESS

Another category of nondeductible educational expenses is those expenses a taxpayer incurs that qualify a taxpayer for a new trade or business.15 The tuition costs an engineer incurs in obtaining, for example, a law degree are nondeductible because they qualify the engineer for a new trade or business.16 This disallowance of a deduction applies even if the taxpayer's educational advancement would be beneficial to the taxpayer in performing his current scope of employment duties and even if the taxpayer intends to continue to work in his current profession.17

Assuming a taxpayer incurs deductible educational expenses, related expenses are deductible as well. More specifically, a taxpayer may deduct, along with tuition expenses, associated costs for travel, meals and lodging.18 If a taxpayer, however, engages in other activities (eg., sightseeing, social visiting, entertaining or other recreation) while pursuing his education, the portion of the expenses attributable to such endeavors constitutes nondeductible personal expenses.19

Obtaining an MBA Degree

Educational expenses associated with the attainment of a professional degree (eg., in medicine or law) usually are not deductible.20 Ordinarily, this is because obtaining such a professional degree either constitutes the minimum educational requirement to qualify the taxpayer for a trade or business21 or, alternatively, such a degree qualifies a taxpayer for a new trade or business.22

Unlike other professional degree programs, the tax consequences surrounding the deductibility of MBA tuition expenses are more ambiguous. On the one hand, MBA tuition expenses appear deductible because the courses of study that comprise most MBA programs (with courses in accounting, economics, finance, management and marketing) are broad enough that many aspects of it invariably help maintain or improve a taxpayer's current set of job skills. On the other hand, the same course of study may qualify a taxpayer for anew trade or business. On this basis, such tuition expenses would not be duductible.

Using two cases, JS. Schneider23 and S.G. Sherman,24 this analysis explores the plight of two taxpayers who obtained their MBA degrees. In both cases, the taxpayer attended Harvard Business School, received an MBA and deducted the costs associated with obtaining this degree. Yet, in Schneider, the Tax Court held that the taxpayer was not entitled to deduct his MBA tuition costs, whereas, in Sherman, the Tax Court held that such tuition expenses were deductible. The contrasting outcomes in these two cases help illustrate under what circumstances MBA tuition expenses will be deductible and when they will not.

The reason the Tax Court ruled against the taxpayer in Schneider was twofold. First, the taxpayer was not considered to be carrying on a trade or business because, before the taxpayer attended Harvard, he was an Army officer involved in troop training rather than being engaged in a trade or business. While at Harvard, he had not obtained a temporary leave of absence from his employer, and after he graduated from Harvard, he stayed in school for an additional year to pursue a masters degree in public administration. Second, the court held that even had the taxpayer been carrying on a trade or business, the taxpayer's education qualified him for a new trade or business. As the court observed, the taxpayer's position in the Army was far different from the position the taxpayer subsequently took as a business consultant for which his course of study at Harvard prepared him.25

For converse reasons, the Tax Court in Sherman held in the taxpayer's favor. On the basis of the following three findings, the court ruled that the taxpayer carried on a trade or business before, during and after attending Harvard: