I was recently hired to start a new division for a small company -- essentially starting up a new company. I'm planning to get a master's of business administration, under one of the popular programs to earn an MBA while you're fully employed, in order to gain the skills I need to build this new business properly and help it thrive. My employer is too small to be able to help me with the considerable expense of this program.
My question: Is there any way it could be tax-deductible?
Considerable expense is right. You could be talking about an investment of $25,000 or more, plus two to three years of your time. On the other hand, this degree could qualify you for bigger and better things -- and there's the rub.
Normally, education costs are considered personal (read nondeductible) expenses. But expenses for education that allows you to maintain or improve the skills required in your business, or that is mandatory for you to keep your current job, can be deductible.
Notice the wording above -- it's key. You can't deduct courses that prepare you for another line of work, or that are required for you to meet the minimum educational requirements for your job.
Some IRS employees once tried to write off law school, arguing that their newfound understanding of the law allowed them to be better tax employees. They lost that battle, because their degrees qualified them for a whole new profession -- something the agency suspected was their goal all along.
As you can probably guess, this is a huge gray area of tax law. If you get audited, you might be in for a fight. The higher the expenses, especially relative to your income, the fiercer the fight could be.
It would make sense to consult with a tax professional who can review your job in detail and discuss your chances of successfully defending these expenses in an audit.
If you do decide to deduct your education expenses, remember that they are normally deducted on Schedule A as an employee business expense; only the amount greater than 2 percent of your adjusted gross income can be deducted.
Even if you can't deduct your MBA training, you might be able to qualify for the Lifetime Learning Credit. You can take the credit for as much as 20 percent of your tuition and fees, up to a maximum of $1,000 a year, if your adjusted gross income is less than $40,000 if you're a single filer or $80,000 if you're married and filing jointly. The credit phases out for people with higher incomes, and it disappears completely at $50,000 for singles and $100,000 for married people.
It's a drop in the bucket compared with the expense of getting an MBA, but at least it's something.