Typically, the IRS looks down at people trying to deduct MBA costs. In Kopaigora v. Commissioner (TC Summary Opinion 2016-35), the taxpayer attempted to deduct his MBA costs as unreimbursed employee expenses.
The taxpayer was an accounting and finance manager with Marriott LAX. While working at Marriott, he also pursued his MBA and took deductions as unreimbursed employee expenses. Eventually, the taxpayer was fired from Marriott and still continued to take the deductions. The IRS audited his return and disallowed these deductions.
The first step in analyzing education deductions is it meets the ordinary and necessary test of IRC 162. Also under IRC 162, the taxpayer must be engaged in a trade or business. The court points out an interesting case where, "A taxpayer may be engaged in a trade or business, although unemployed, if the taxpayer was previously involved in and actively sought to continue in that trade or business while pursuing a defined degree program related to his or her line of work. Furner v. Commissioner 393 F.2d 292, 294 (7th Cir. 1968).
So, while the taxpayer was unemployed, he could still meet the requirements under IRC 162 of being in a trade or business.
Education cannot be deducted if 1) it is required to meet minimum requirements of a taxpayer's trade or business, or 2) the study leads to qualification for a new trade or business. If the taxpayer shows neither apply, then he can deduct the costs required by his employment or trade or business. The court here held that he was improving his skills as a accounting and finance manager.
This is an interesting look at the education deduction and the rules applied. The biggest take away from the case is further reassurance that the taxpayer does not need to be employed in order to take a deduction for unreimbursed employee expenses.
Relevant Citations: TC Summary Opinion 2016-35
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