Developing and training staff improves any business but educational fees can quickly add up, and before you know it, your company can be stuck with a hefty bill. Fortunately, the regulations under Internal Revenue Code 162 confirm that certain education expenses qualify as both ordinary and necessary trade or business expenses, which, when paid or incurred during the course of a taxable year are deductible.
What is considered ordinary and necessary?
Ordinary expenses are normally or likely to be incurred during the course of business activities. They do not, however, have to be habitual or normal.
Necessary expenses are those considered appropriate and helpful under the circumstances. This is a facts and circumstances based test.
What qualifies as an educational expense and when does it qualify as deductible?
Tuition, student activity fees, textbooks and supplies necessary for enrollment or attendance at any eligible educational institution (college, university, vocational school or other postsecondary educational institution with a U.S. Department of Education student aid program) qualify as educational expenses.
The expenses above must maintain or improve the skills required by the employee to perform his/her function.
Expenses in question must also meet express requirements of the employer, laws or regulations applicable to the level of employment, or must be imposed as a condition of employment retention.
What work-related education does not qualify?
If either of the following applies, the employer cannot claim the deduction:
- The education sought is part of a program that will qualify the employee for an entirely new trade or business. For example, an auditor taking tax classes would qualify as deductible, as duties have changed within the framework of accounting, whereas an electrician studying dentistry would not qualify as deductible.
- The education is needed to meet the minimum educational prerequisites for qualification for employment.
What are the benefits?
There are benefits for both employers and employees with respect to education expenses:
- The cost of qualifying expenses is used to reduce trade or business income to the employer while increasing the knowledge base and expertise of the employee.
- Provided a written plan exists, and other considerations are met, the first $5,250 of educational assistance provided to an employee is excluded from the employee’s gross income subject to tax.
- Self-employed individuals also reduce the amount of income subject to self-employment tax.
- Employees may be eligible for tuition credits or deductions, such as the American opportunity and lifetime learning credits, for expenses not paid for/reimbursed by the company and not otherwise excluded from gross income.
Providing an education assistance program stimulates employee loyalty while allowing employers to retain, develop and advance quality workers. Consider the qualifications for educational expenses and see if providing higher education to your employees could benefit the company.
For more information about deductible education expenses, please contact any member of our Tax Services group at 888-857-8557.