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Tax Deductions and the MBA

The U.S. Tax Court recently ruled that an MBA student who deducted $17,000 in tuition expenses from his 2009 tax return owes more than $2,500 in back taxes to the Internal Revenue Service, Bloomberg BusinessWeek reports. Ouch. As follow up, Bloomberg BW offers a few things to keep in mind regarding tuition deductions.

“The rules for deducting educational expenses sound simple enough: Tuition is deductible when it pays for coursework that enhances skills necessary for an established job or business, as well as any courses required by an employer,” reads the Bloomberg BW article.

Of course, even the simplest rules can quickly grow complex. For instance, what if the skills you gain through an MBA not only enhance your ability to perform your current job but also qualify you to pursue a new career?

“There isn’t a bright line distinction that says, if you’ve worked so many years, making a certain salary, you can claim the deduction,” David Young, a partner at Young and Co. in Rochester, NY, told Bloomberg BW. In terms of tuition deductions, if an auditor challenges the deduction, it falls on the taxpayer to prove that the MBA is a business expense, Young adds.

Doing so can be tricky, but the tax court has ruled in favor of MBA candidates who have claimed tuition deductions in the past, according to the Bloomberg BW report. Although this most recent case, in which the court ruled that Rollins College MBA Adam Hart owes money in back taxes, may embolden auditors to pursue cases. “Every time the IRS gets a case like this, they become more self-assured,” Bob Charron, a partner at Friedman in New York, told Bloomberg BW.

Large deductions, too, are more likely to attract auditors’ attention, Jackie Perlman, principal tax analyst at the Tax Institute, the research and analysis division of tax prep company H&R Block told Bloomberg BW. When in doubt, it’s probably best to consult an expert. Especially since taxpayers who appear to have intentionally flouted rules often face stiffer penalties, and it’s hard to claim financial illiteracy as a business school student…

Read the complete Bloomberg BusinessWeek article, “The IRS Just Won a Tuition-Deduction Case against an MBA. Could You Be Next?