A recent decision of a specialised court should encourage more students enrolled in US MBA programmes to deduct their tuition – especially if they are getting an Executive MBA (EMBA). The Wall Street Journal looks into the case and its implications.
The EMBA tuition tax-deduction case
Mr. Kopaigora and his wife Elizabeth deducted 18,879 USD for tuition, commuting and other expenses on their 2011 tax return that the Internal Revenue Service (IRS) disallowed, in part because he was unemployed for several months of the year.
But the judge disagreed with the, saving the Kopaigoras 2,111 USD in taxes. This decision provides more arguments to MBA students who want to deduct education expenses in the future.
Robert Willens, a tax expert who teaches at Columbia University's business school and has advised hundreds of MBA students on the ins and outs of deducting tuition, shares that this case is a big win for all MBA students.
Implications for US MBA students
The decision on this case was released earlier this month by the US Tax Court, a specialised tribunal. Although the case is of a type that can't be appealed or formally cited as precedent, experts say such cases are often influential both inside and outside the IRS.
Most recent data of the US Department of Education shows that about 110,000 students were pursuing graduate degrees in business in 2014. About 12,000 students were enrolled in EMBA programmes in the U.S. in 2015, according to the Executive MBA Council, and three-quarters of them paid all or part of their own expenses.
The US tax law rules allow deductions for education costs as "unreimbursed business expenses" for employees (on Schedule A) and for the self-employed (on Schedule C) – but not if the courses prepare the student for a new type of business or license, such as for law or nursing.
In practice, this requirement often precludes taxpayers from taking deductions for both undergraduate and graduate education expenses, although other tax benefits may help with these costs.
Many MBA students qualify for a deduction, however, because they have worked before enrolling in a programme and are seeking to "maintain or improve" their skills, as the law requires. In addition, the degree doesn't lead to a license.
However, experts share that the IRS often challenges MBA deductions. Although the agency has lost court cases in this area, it has succeeded in asserting fine distinctions.
For example, if an MBA student switches fields after graduation, it is harder to justify a write-off. So an MBA candidate who previously worked in finance and returns to it will have a stronger case for a deduction than one who switches to consulting after graduation.
The Kopaigora decision helps MBA students in two ways, says Mr. Willens. It is the first to justify deductions for an executive MBA program. In addition, the judge allowed the deductions as "unreimbursed business expenses," even though Mr. Kopaigora was unemployed for part of the year he was pursuing the degree.
This is good for taxpayers who are unemployed because they are MBA students. "Now it's harder for the IRS to say that being in a full-time programme bars the deduction," says Mr. Willens.
Source: The Wall Street Journal