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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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Training You Can't DeductIn our last column, we found that the kind of education that qualifies as a business expense deduction must either be required by law or needed to maintain or improve skills. This week we consider what kinds of education the IRS does not accept. You cannot deduct education costs if:
or Education To Meet Minimum Requirements You cannot deduct the costs of pursuing the minimum requirements necessary for your profession, trade, or business. It doesn’t matter whether these minimum requirements are required because of laws, regulations, or industry standards. For example, Rachel Realtor took the six-week real estate course required to get her realtor’s license. The costs of the course are not deductible. What if the minimum educational requirements change? If state law changed and required all realtors to take an additional course on mortgage financing, Rachel would have to take the course before she could get her license renewed. Because she had already met the minimum requirements when she originally got her license, the cost of the new course would qualify for deduction. The IRS (referring to employees, but it also applies to self-employed people) says, "If the minimum requirements change after you were hired, any education you need to meet the new requirements is qualifying education." However, a new applicant for a realtor's license would have to satisfy the new minimum requirements and could not deduct any of her schooling, including the mortgage-financing course. The fact that you are currently doing work does not necessarily mean that you have met the minimum educational requirements of your trade or business. For example, Arturo Architect is attending college with the intention of becoming an architect. To help pay his college expenses, Arturo freelances for several local architectural firms. He prepares architectural drawings and researches the cost and availability of new materials. Although his college courses in architecture improve the skills he uses in his freelancing, he has not met the minimum job requirements of an architect. His college education does not qualify for a business expense deduction. Education that Qualifies You for a New Trade or Business You can deduct the cost of your education if it is an expansion of or closely tied to your present work. If a freelancer attends a workshop because his business has changed its focus, he can deduct the cost as long as he’s not going into a new trade or business and his business' new focus involves the same general work he’s already doing. Thomas Twocareers, a real estate agent, decided to become a massage therapist, so he enrolls in an intensive, expensive, six-month course in his new chosen field. The cost of the course does not qualify for deduction. His trade has veered off in an entirely new direction. Education that is part of a program that can qualify you for a new trade or business not related to your present trade, is nonqualifying education. Also, review courses to prepare for the bar examination or the certified public accountant examination cannot be taken as educational deductions. Why? The expenses are incurred to qualify for a new profession. Bones of Contention There are more arguable and less clear-cut cases of whether certain courses or workshops qualify for deduction. For example, after becoming a psychoanalyst, Dr. Shrink decides that the key to understanding the mind lies in computer theory. She takes an intensive course in cybernetics to discover the sources of reason. Or: Dr. Shrink decides that mind and body are so closely linked that she wants to combine and incorporate both in her work, so she undergoes training in Rolfing, a form of physical therapy that attempts to explore manifestations of neurosis that show up in physical problems. Or: After the training in Rolfing she also takes a course in nutrition and its effect on behavior psychology. In all these cases Dr. Shrink and the IRS might each have cause to argue whether such courses were qualified for deduction. You now know that to deduct education costs as a business expense, it is necessary that you get beyond the minimum requirements of your field, that you are actively working in or returning to your field, and that the education must be demonstrably related to your field. In that context, consider Dan Desert, whose hobby is landscape design. He’s advanced from playing in the sandy dirt to playing around with landscape designs on his computer. By necessity and hands-on, trial-and-error experience he has learned to solve a lot of his computer difficulties. He’s become so skillful that he can doctor existing programs to fit the landscaping needs of creative xeriscape designs. If he decides to take courses to become a computer- based landscape designer, he will not be allowed to deduct the cost of the courses. If, however, he started his business, and charged fees to design desertscapes and then took the courses, the educational costs would qualify for deduction because he would already be in the business of landscape design. So a word to the uneducated -- open your business early and then get smarter. (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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