MBA Tax Deduction
So, news broke that a nurse, who was in quality control, singlehandedly fought the IRS in tax court on the deductibility of her MBA program and won. This is no small feat considering that the IRS wins about 90% of the time. So the IRS with their legal team did not convince the court. In response, MBA students around the country have applauded, cheered and are putting down their tuition in Schedule A to write theirs off. Sounds great, right? Well...not so fast.
Ms Singleton-Clarke had perfectly organized her case and clearly demonstrated the requisite fact pattern. She had job descriptions from each of her jobs detailing the fact pattern that she was a quality control nurse before, during and after school and that the MBA program was there to help her do a job that she already was doing just a bit better. The jobs that she had before, during and immediately after her degree didn't require and MBA. Based on her experience, she demonstrated to the court that she would have received the job even without the degree. The documentation exercise here is crucial - even the court found that her impeccable records helped her case as she systematically pursued that the skills of an MBA program would help her assess quality metrics, but that she was already skilled enough to do that job.
Ultimately, the court ruling comes down to whether the taxpayer was already established in their trade or business. What's your proof? In an age where people change jobs often and job descriptions are equally elusive, it's critically important to get these things down on paper and build your file.
If your preparer is not asking for these documents, tread carefully and debate finding someone who does. To further that point, while this case is remarkable by any standards, I would highly recommend finding a preparer who knows the regulations and the rulings very well. You do not want the IRS coming back to you two years later with their hands out for taxes due, penalties and interest on a 5-figure deduction and have them be right. Considering the preparer penalties involved, most preparers will think twice before taking the write-off knowing that they too are subject to penalties if they claim the deduction incorrectly. As such, you should have a preparer who is conservative enough to give some comfort that your case satisfies the regulations and isn't just putting it through and hoping that it sticks. It's a case where you want someone else to sign off on your return just to demonstrate to the IRS that this has been carefully reviewed. It's not that professional returns aren't audited. It's not that at all - you just want someone else to review and share some of that responsibility with you. Just remember, the penalties, tax and interest are your responsibility, not your preparers. The preparer would separately answer to the IRS for mistakes, but there's no guarantee that your preparer will pay the difference if you're audited and your deduction disallowed. Know the rules - vet our your preparer thoroughly and then make the millions that inspired you to attend business school in the first place.
Many happy returns,
Josh
PS If you want to check out the case, drop me an email and I'll send it over to you.
