Back to School? Tax Breaks for Continuing Your Education
For a small business owner, work-related education is a win-win proposition. First, you gain skills and knowledge that can help grow your business. Second, your qualifying expenses are deducted directly from your business income. This reduces the amount of your income subject to both income tax and self-employment tax.
Those who are self-employed have an easier time deducting education costs as a business expense than employees do. An employee must establish not only that the courses were business-related, but must also establish that the employer required him or her to take the courses.
Only work-related education can be deducted as a business expense. Courses taken for personal enrichment are not deductible. Education is considered work-related if it meets either one of these two tests:
- It is required by law to keep your present salary, status or job. For example, an accountant can claim a deduction for continuing profession education necessary to maintain the CPA license.
- It maintains or improves skills needed in your present work. For a small business owner, that can cover a wide variety of topics, such as basic bookkeeping and accounting classes, continuing education in your field, marketing and personnel management courses.
Davey runs a business that repairs televisions, radios, and stereo systems. To keep up with the latest changes, he takes special courses in radio and stereo service. These courses maintain and improve skills required in his business; therefore, he can deduct them.
However, you can not claim a deduction for any education that
- is needed to meet the minimum qualifying educational requirements of your present trade or business or
- qualifies you for a new trade or business.
This means that the cost of taking "Basic Recordkeeping for Small Business" would be deductible, while taking all the courses to qualify to take the CPA exam would not be deductible.
Although courses that lead to a degree can be deductible, it can be more difficult to establish that obtaining a degree does not qualify you for a new trade or business. That said, it certainly can be done. You must carefully map your coursework to your current business. In addition, you still must establish that each course was work-related.
Anne owns and operates a small restaurant. In order to make her business more profitable, she enrolls in Culinary Management courses. Although these courses can lead to an Associates degree, they will not qualify her for a different line of work than what she is currently doing. She can deduct the costs of the courses related to running her restaurant successfully. However, she can not deduct the cost of the fine arts course that she took to satisfy her degree requirements because that course is not work-related.
What Expenses Can You Deduct?
Assuming that your education meets the requirements for qualifying education, you can deduct the following expenses.
- Tuition and lab fees. Tuition can include costs for online instruction and private tutoring, if the qualifying education requirements are met.
- Books and supplies. Both required and recommended textbooks can qualify if there is a clear business connection for the recommended books.
- Transportation and travel costs. Travel costs are generally deducted in the same way—and subject to the same limitations—as any other business-related travel.
- Other expenses related to the education, such as the cost of research and having papers typed.
Transportation expenses. Transportation costs for qualifying education generally are treated the same as all other business-related travel. In addition to the cost of using a car, you can deduct the actual costs of using public transportation, such as a bus, subway, or cab.
Transportation expenses do not include amounts that you spend on meals or lodging. However, if you met the requirements for business-related travel away from home, you can deduct those expenses as travel costs under the standard rules.
You can always deduct the cost of driving between your place of business and your school. However, whether you can deduct the cost of going from home to school, or vice-versa, depends upon whether or not your attendance at school is reasonably expected to last one year or less.
If your attendance is expected to last one year or less, it is considered temporary. This means that you can deduct the cost of returning home from school. You can also deduct the round-trip cost of transportation between your home and school, regardless of where your school is located, the distance that you travel or whether you go to work on those days.
Example (1). Anita owns a gift shop in a town near where she lives. Each night she goes directly home from the shop. Two days a week she travels from home to the local community college to take course in inventory management, which improves her business skills. The course lasts three months, so her attendance is considered to be temporary. Therefore, she can deduct her round-trip transportation costs from her house to her school.
Example (2). Judy is a professional photographer. She takes a nine-month course on special effects photography. The class meets on Saturday morning. Because her attendance is expected to last less than a year, she can deduct her transportation costs in going between her home and school each Saturday.
Be forewarned: You can't deduct personal expenses or capital expenses.
As part of her photography course, Judy is required to purchase two textbooks and pay a $200 lab fee. To practice what she is learning, she purchases additional equipment that costs $820. She can claim a business expense deduction for her tuition, lab fees and textbooks. However, because the equipment is a capital asset, she can not deduct the cost as a business expense. However, if she uses the new equipment in her business, she can recover the cost through depreciation
How to Claim the Deduction
If you are self-employed, you report the cost of your qualifying work-related education on your Schedule C (Form 1040), Schedule C-EZ (Form 1040), or Schedule F (Form 1040). If your education expenses include transportation, travel or meal expenses, the standard rules for business-related travel apply. You report those expenses along with your other business expenses for those items.
These work-related education expenses may also qualify for other tax benefits, such as American Opportunity Tax Credit and lifetime learning tax credit. The general rule is that credits are better than deductions because a credit reduces tax liability dollar for dollar, but a deduction merely reduces taxable income. However, in this case, the deduction may well be more valuable.
First, it is a deduction from the income of your business. This not only reduces you gross income, it can also reduce the amount of self-employment tax that you will owe.
Second, both the education credits are limited to relatively small amounts and are phased out at relatively low-income levels. Therefore, they are unlikely to significantly lower your tax bill.
However, whenever you have multiple options, you must run the numbers to see which choice saves you the most in taxes.
But, remember, no double-dipping. You can't use an expense more than once.