by LeAnne M. Matthews
as appeared in
the Monday, March 4, 1996 edition of The Wharton Journal, (Volume 40, Number 8)
As a CPA from Ernst & Young LLP, I have a recently been asked by many fellow students whether it is advisable to deduct ones MBA expenses from ones income tax return. Fortunately for me, but unfortunately for them, personal income taxes was not my area of expertise. All the same, the question has loomed before me ever since I started investigating the possibilities of attending business school and consequently I do have some knowledge on the subject. I’ll pass on what I know.
For those of you unfamiliar with the definition of qualifying educational expenses, educational expenses are deductible to the extent that 1.) the education is required by your employer or the law to keep your present salary, status or job or, 2.) the education maintains or improves skills needed in your present work. However, if the education is needed to meet the minimum educational requirements of your present trade or business or is part of a program of study that can qualify you for a new trade or business, even if you have no plans to enter that trade or business, it does not qualify for deduction. This definition is taken from the Ernst & Young Tax Guide.
My research really started when I began interviewing people about the benefits of getting my MBA at one of the top business schools. It seemed that nearly everyone I talked to pointed out the fact that I could deduct the expenses and thus it was not really as expensive as it initially appeared. Each of these individuals stated that they had done so, and at the time of our discussion, none of them had been challenged by the IRS.
Upon arriving at Wharton, I basically put the issue on the backburner as I developed my strategies for surviving the first few months at Wharton. However, as the filing date drew ever nearer, I again increased my research efforts.
My renewed efforts began with a call to Karl Fava of Business Financial Consultants, Inc. based on his ad in the Wharton Journal. He advertised the fact that he would do our returns and deduct our MBA expenses. Karl basically explained the regulation to me and pointed out that he had been doing MBA returns for six years and that only two of his clients had been challenged by the IRS. One of these individuals settled out of court, keeping 70% of the deduction, as he did not want to go through the efforts of a long battle with the IRS. The other individual prevailed in the case brought on by the IRS by proving that he was in a management position before his MBA and remained in a management position after obtaining his MBA. If you would like to give Karl a call, he can be reached at 1-800-238-2188. He can certainly provide you with more information and assistance on the topic as well as your return.
With this information in mind, I contacted one of my former colleagues at Ernst & Young and asked her to do a bit of research on the topic and give me her opinion on the advisability of taking the deduction. She again reiterated the above information and recommended that I not take the deduction. She knew that this was not what I wanted to hear and stated that if I wanted to take an aggressive position on the issue, I could certainly do so, but it would not be what she would recommend.
Finally, I attended the seminar held on campus by Professor Carl Polsky and was provided with quite a bit more information on the potential deductibility of the graduate education. Dr. Polsky annually provides a seminar where he promotes the tax deductibility of one’s graduate education.
So I now leave all of you to draw your own conclusions on how to treat the issue on your personal return. It is definitely a gray area of the law. I wish you luck in your decision.