Mastering the Deduction of Postgraduate Education
2 Embodied in Internal Revenue Service Regulation Section 1.162-5, the rules for deducting education costs state that such expenses may be deducted only if the education maintains or improves skills required by the individual in his or her occupation, or is needed to meet the express requirements of the individual's employer or is imposed (by applicable law or regulations) as a condition to the individual's retention of his present employment, status or salary. Expenses meeting these tests will be deductible even if the education leads to a degree. At the same time, education expenses may not be deducted (even if otherwise qualifying) if the education is necessary to attain the minimum requirements for qualification in the taxpayer's occupation or if it will qualify the taxpayer for a new trade or business. This restriction is strictly defined. An individual who does work as a tax accountant may not deduct the cost of courses that prepare him to be a certified public accountant or a lawyer; being a CPA or a lawyer is considered an entirely different trade or business. Postgraduate education. The question of deductibility often comes up in the context of postgraduate courses or education that leads to some further specialized area of expertise, for example, when a lawyer or CPA attends school to obtain a graduate degree in taxation. The costs of such education are subject to the same rules that apply generally. The key factor is that the education must relate to the taxpayer's present employment; that is, to be a deductible business expense, the individual incurring the costs must already be in the trade or business. Again, this requirement is strictly construed. Thus, the costs o review courses for individuals subject to state licensing tests, such as CPA or bar examinations, are not deductible; these individuals are not yet in th(? trade or business of being a CPA or lawyer. Similarly, individuals who take! a course of study for an advanced degree immediately after graduating from law school are denied deductions for the costs of this advanced study. The same is true for those who go to graduate school after working as a law clerk or after being admitted to practice law within a jurisdiction but without actually having practiced law; again, such individuals are not in the trade or business of practicing law when the cost is incurred. Likewise, a CPA licensed to practice in one jurisdiction may not deduct the costs of courses enabling him to practice in another jurisdiction; being able to practice his profession in this other jurisdiction is considered as qualifying him for a new trade or business. …