The DOs and DON’Ts of
writing off your MBA
Deduct your MBA and save thousands on your tax bill
For most taxpayers, tuition dollars fall under the what used to be the Hope credit or the Lifetime learning credit. Some others will also qualify for a tuition deduction. There is one more option which doesn’t have a direct limitation or phaseout because of income. That would be for an unreimbursed job expense. In simple terms, you spent some money on your job, but weren’t reimbursed by your employer. Or alternatively, your employer reimbursed you in cash, but then also reported the same amount as wages on your Form W-2.
The unreimbursed business expense is a neat way to take a deduction because the income limitations are much higher than lifetime learning credit or the tuition deduction.
Here are the rules:
1. The MBA cannot qualify you for a new trade or business
2. The MBA cannot be the minimum skills to enter a job
3. The MBA must maintain or improve your skills
It can’t be part of the minimum skills to enter a profession.
Say you wanted to become an auto mechanic. Going to the trade school is part of the minimum skills required to be an auto mechanic. Not deductible. To elaborate a little further on the above comments. If you decide to go on for law school – the law school bill wouldn’t be deductible because going to law school (for most states) is a basic requirement before becoming a lawyer. And even if you didn’t want to become a lawyer, you are now qualified to be a lawyer, so going to law school itself would qualify you for a new business so law school is going to be nixed.
The education maintains or improves skills.
Think of it as continuing education. As a CPA, I am required to take classes so that I can maintain or improve my skills as an accountant. So, under this provision, I’m allowed to deduct my classes. Business school works in a similar way.
Duke University
By contrast, business school really doesn’t inherently qualify you for anything. I say this as a card-carrying member of Duke University’s Fuqua School of Business Alumni Association. Now that said, if you enter business school after a successful career as a school teacher and are pursuing your MBA to become an investment banker – then the fact pattern says that you have a new trade or business.
But let’s just say that you’re an engineer, you pursue your MBA, and then continue on your engineering career track, then you will pretty much be successful in justifying the write-off. This situation is very common with executive MBA students who are pursuing their MBA programs while working for the pure reason of getting ahead.
The IRS does get a little more curious when students enter a full-time MBA program, but the easiest case is for working professionals.
Here is the catch — this deduction is subject to a 2% floor of your adjusted gross income and the deduction is added back for Alternative Minimum Tax (AMT) purposes. So, if you had income of $100,000, then the first $2,000 of your write-off is excluded. And if you’re subject to AMT, then this deduction may be limited. You also may lose out on the deduction if you’re subject to a phase out of your itemized deductions. That said, for many taxpayers, it can take a very big bite out of your tax burden while you’ve pursued your degree. The deduction also applies in many states – though it gets very tricky. For example, Pennsylvania specifically says, “no”. New York says “yes” and further, New York doesn’t have an AMT issue on this one so you can take the full amount off of your state taxes.
Let’s just say you qualified for the Lifetime Learning credit. No problem – max out the credit there and then deduct the rest as an unreimbursed business expense. You can’t double dip, though.
You would also still qualify for the deduction if you paid for your degree with student loans. You would even qualify if your employer reimbursed you for the expense, but then included the reimbursement as income in Box 1 of your Form W-2.
Lastly, I would not take this deduction without consulting a very well qualified tax advisor and probably wouldn’t use a do-it-yourself solution on this. This deduction is heavily audited and frequently disallowed – so knowledge of the tax code is very important. Frankly, the two years I did not prepare my own return were the two years of my business school program just for this reason. I even wanted to demonstrate to the IRS that I had another CPA sign off on whether or not I qualified. Paying the couple hundred dollars to get some extra comfort may be worth the $50,000-$100,000+ in deductions headed your way.
If getting $50,000-$100,000 sounds interesting and you think that you may qualify, contact us.
