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Columns by June Walker: IPs Face Unique Tax Challenges Tax Deductions Are There For The Taking You Say You're Self-Employed -- Will the IRS? Do You Have a Business or a Hobby? Proving That You're a Business Keeping Records -- It's Not Just for Taxes Three Ways to Expand Your Business Deductions Can I Deduct Disneyland and Other Questions Mixing Business with Pleasure and Other Gray Areas Getting There is Half the Battle Getting Credit and Taking Allowances Advertising: Do It, Then Deduct It The Subtle Art of Advertising Deductions Billy Bridesnapper's Start-up Saga Giving Gifts, Taking Deductions
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Courses That QualifyAfter almost a decade in business, Caitlin Caterer is prospering. Never having specialized in any specific type of food, her catering service has always done its best to fill requests for all sorts of cuisine. She has noticed that many of the young professionals moving into her area are vegetarians. They are well-off and throw lots of parties. She doesn't understand how they can pass up veau orloff, but for the sake of her business she wants to be ready, willing, and able to cater to their tastes, and has concluded that it would benefit her business to be better versed in the art of vegetarian cooking. A teacher who accepts very few students has been recommended to her, but his course in meatless cooking is quite costly. After checking with her tax advisor, Caitlin decides to take the course. She has learned that she can deduct the tuition for the class, the materials required for the class, as well as her transportation there and back. So it will be less expensive than she thought. Defining allowable business education expenses To deduct education expenses, an IP must determine the following: 1. Does the course qualify as business education?
2. If the course, seminar, convention, or workshop does qualify, which of the costs related to the education are deductible as business expenses? According to the IRS, courses must meet at least one of the following tests to qualify as business education:
You cannot deduct education expenses you incur to meet the minimum requirements of your present trade or business or those that qualify you for a new trade or business. Education required by law Once you have met the minimum educational requirements for your business, you may be legally required to get more education to hold on to your present position or status. For example, Stella Stockbroker works out of her home office. She has satisfied the minimum requirements for a Series Seven license. She has to take continuing education courses required by the Securities and Exchange Commission and the National Association of Securities Dealers to maintain her licensed status. Education required by your employer The IRS also allows deductions for education required by your employer. As you are self-employed and thus your own employer, you have to decide for yourself (or with the help of your tax consultant) whether your deductions will meet the criteria. Furthermore, many self-employed professions and businesses are not licensed, and for some no certification is necessary, which means that the education you require of yourself is even more of a judgment call. So what do we have to go by? For one thing, there's the IRS admonition: "In order to be deductible, a business expense must be ordinary and necessary to your profession." What you require of yourself as your own employer is determined by the next criterion, coming right up. Education to maintain or improve your skills Education not required by laws or regulations may qualify for deduction if it maintains or improves skills or knowledge required in your present work. A course or workshop may be academic or vocational in nature, and may include categories such as refresher courses, seminars on current developments, and correspondence courses. Example 1: Rebecca Repair fixes TV sets, VCRs, radios, and electronic music systems. These technologies are changing so fast that she has subscribed to a service that keeps her up-to-date by email. She also takes seminars and workshops whenever her schedule permits. The email service and the seminars maintain and improve skills required in her work. Example 2: Angelo Auto Repair has been fixing cars -- radiators, mufflers, electrical systems, and fuel systems -- for several years, but he has always sent potential customers elsewhere for accident collision repair. Now Angelo has decided to expand into collision work, but first has to take a course on it at the local community college. Would Angelo shock his friends by announcing that he's going to straighten out bent fenders and twisted frames? Of course not -- it's a logical development of his business, and he can deduct the cost of the course. Example 3: Sally Shrink, a practicing psychiatrist, is studying at a fully accredited institute to become a psychoanalyst. Her education maintains and improves skills required in her profession, so Dr. Shrink can deduct the cost of the course. Caitlin Caterer should be able to deduct the cost of her class in meatless cooking, Harvey House-Sitter should be able to deduct the course in indoor plants, but Cal Computer Consultant cannot deduct the cost of sending his rambunctious dog to obedience school. Now, if the dog were a guard dog... hmm, maybe. What if you take courses to maintain your skills during a temporary absence from work? You are also allowed to deduct the cost of education to maintain your skills while you are temporarily absent or on leave from your business. The IRS defines a "temporary" leave of absence to be a year or less. In order for the deduction to qualify, however, you must return to the same kind of business. Example 1: Ned Nutritionist enjoys children very much and wants to add more day-care centers to his client list. He leaves his nutrition counseling business to become a full-time graduate student in children's nutrition for one year. Then he'll pick up his business where he left off. He can deduct the costs of his education. Example 2: Eddie Electronic worked as an employee for TV Repair Incorporated, where he was assigned to fix TV sets, though he was qualified to do a lot more. He left the job and took a month-long course in VCRs and compact disc players. Shortly after that he started his own business. He may deduct the cost of the course because it was related to his present work, and because he returned to work in the same field. Since the IRS has no problem with a switch of employers, Ed's becoming his own boss was OK, too. What if you are absent from your work longer than a year, then take courses in the same field? Ned Newdad loved his work as a consultant to big companies on how to escape from hostile takeovers. Self-employment gave him the flexibility he'd always wanted. He also wanted to be a full-time father when his first child was born and was successful and prosperous enough to have the wherewithal to take a year off. He finished up his contract with Gigantic Corporation just before Christmas, only days before his daughter was born. He is planning to return to his consulting business in about 15 months. Because the IRS defines temporary absence as one year or less, any courses that Ned took to keep his skills up to date would not be deductible because he had closed up shop for longer than a year. That brings us to the question of education costs that do not qualify for deductions -- even if they meet some of the criteria we have examined, such as being required by law or needed to maintain or improve skills. I'll cover this in my next column. (c) 2000 June Walker. All rights reserved. We'd love to hear your feedback about this column, or put you in touch with June Walker if you like. You may also like to see her biography. |
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