Hello and thank you for your question.
Here are the IRS annotations in support of the tests summarized in
http://www.generationtax.com/mba.html
Tax Benefits for Work-Related Education
Figure 29-A. Does Your Work-Related Education Qualify?
http://www.irs.gov/publications/images/10311g46.gif
Decision (1). Is the education required by your employer or the law to
keep your present salary, status, or job?
IF Yes Continue To Decision (2)
IF No Continue To Decision (3)
Decision (2). Does the requirement serve a bona fide business
requirement of your employer?
IF Yes Continue To Decision (4)
IF No Continue To Decision (3)
Decision (3). Does the education maintain or improve skills needed in
your present work?
IF Yes Continue To Decision (4)
IF No Continue To Process (a)
Decision (4). Is the education needed to meet the minimum educational
requirements of your present trade or business?
IF Yes Continue To Process (a)
IF No Continue To Decision (5)
Decision (5). Is the education part of a program of study that will
qualify you for a new trade or business?
IF Yes Continue To Process (a)
IF No Continue To Process (b)
Process (a). Your education is not qualifying work-related education.
Continue To End
Process (b). Your education is qualifying work-related education.
Continue To End
End. This is the ending of the flowchart.
Thinking about your MBA program in particular, it seems to me you will
only be able to justify the deduction if the MBA is NOT needed to meet
the minimum requirements of your next job. It seems to me that if the
IRS audits you at a time you are working in an area where the MBA is
required, they will be able to prevail.
Consider Example 1.
http://www.irs.gov/publications/p17/ch29.html#d0e72840
You are a full-time engineering student. Although you have not
received your degree or certification, you work part time as an
engineer for a firm that will employ you as a full-time engineer after
you finish college. Although your college engineering courses improve
your skills in your present job, they are also needed to meet the
minimum job requirements for a full-time engineer. The education is
not qualifying education.
In your favor, however, is the fact that MBAs do not receive a license
the way the engineer in Example 1 did.
Beyond the scope of this answer are the various deductions and credits
that apply to education expenses generally, within certain income
limits. They are summarized here:
http://www.irs.gov/publications/p970/index.html
Now, about part 2 of your question, the worst case scenario if IRS
disagrees with you.
You need not worry about any criminal charges.
Here is the IRS summary of the general fraud statutes
http://www.irs.gov/irs/article/0,,id=106790,00.html
The nearest criminal statute to your situation is that it would be a
crime for you to sign a tax return "which [you do] not believe to be
true and correct as to every material matter."
Title 26 USC § 7206(1) Fraud and false statements
But in reality that would be a case where you tried to deduct
fictitious education expenses. In your case you will have paid the
tuition, etc., and that's not fraud (there is also a different burden
of proof, etc. that makes it virtually impossible for you to be
charged criminally).
There would be a real possibility of the following civil penalties:
http://www.irs.gov/publications/p17/ch01.html#d0e8830
Accuracy-related penalty. You may have to pay an accuracy-related
penalty if you underpay your tax because:
You show negligence or disregard of the rules or regulations, or
You substantially understate your income tax.
The penalty is equal to 20% of the underpayment. The penalty will not
be figured on any part of an underpayment on which the fraud penalty
(discussed later) is charged.
Negligence or disregard. The term ?negligence? includes a failure to
make a reasonable attempt to comply with the tax law or to exercise
ordinary and reasonable care in preparing a return. Negligence also
includes failure to keep adequate books and records. You will not have
to pay a negligence penalty if you have a reasonable basis for a
position you took.
The term ?disregard? includes any careless, reckless, or intentional disregard.
Adequate disclosure. You can avoid the penalty for disregard of
rules or regulations if you adequately disclose on your return a
position that has at least a reasonable basis. See Disclosure
statement, later.
....
Substantial understatement of income tax. You understate your tax if
the tax shown on your return is less than the correct tax. The
understatement is substantial if it is more than the larger of 10% of
the correct tax or $5,000. However, the amount of the understatement
may be reduced to the extent the understatement is due to:
Substantial authority, or
Adequate disclosure and a reasonable basis.
If an item on your return is attributable to a tax shelter, there is
no reduction for an adequate disclosure. However, there is a reduction
for a position with substantial authority, but only if you reasonably
believed that your tax treatment was more likely than not the proper
treatment.
Then apart from the above possible penalties, there is always
interest, currently 5% on underpayments of tax:
http://www.irs.gov/newsroom/article/0,,id=120820,00.html
To conclude, the 'trade or business' argument is available to you, but
I have my doubts whether it will survive an audit if at the time you
are working in a job for which the MBA was a requirement. You'll need
to weigh the pros and cons in deciding how to file. And as noted
below, this answer is not intended to substitute for informed
professional tax, legal, investment, accounting, or other professional
advice.
Search terms used:
irs education expense mba
education "carrying on" "trade or business" site:irs.gov
Thanks again for bringing us your question. If you find my answer
unclear, please request clarification. I would appreciate it if you
would hold off on rating my answer until I have a chance to respond.
Sincerely,
Richard-ga |
Clarification of Answer by
richard-ga
on
17 Aug 2004 06:13 PDT
In my Answer, I conclude that while the 'trade or business' argument
is available to you, "I have my doubts whether it will survive an
audit if at the time you are working in a job for which the MBA was a
requirement."
There's an article on the subject in the August 17, 2004 Wall Street Journal:
"The Internal Revenue Service is increasingly challenging taxpayers'
ability to deduct M.B.A. educational expenses. Earlier this month,
the U.S. Tax Court ruled against Tracy McEuen, who sought to deduct
$20,317 of expenses.
....
"The judge in the McEuen case, John Dean, argued that Ms. McEuen's
M.B.A. was necessary to meet the minimum-education requirements to be
an investment banker. Even though she worked as an analyst at an
investment bank before school, she hadn't tecnically established
herself as an "investment banker" because an M.B.A. was a requirement
to become an "associate" in the industry at that time...."
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