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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.

IRS Letter Ruling (TAM) 9112003. Against this backdrop, consider the taxpayer in IRS Letter Ruling TAM) 9112003. The taxpayer had been licensed to practice his profession :in this case, law) for three years. A portion of his practice, but only a portion, dealt with tax law. He then applied for and was admitted as a candidate for a master's degree in taxation. When this program began, he resigned his position and began his full-time studies (which were to take one school year, that is, nine months). However, while in school, he continued to be available to his own clients for legal consultation (as his time permitted). In addition, he stated that, upon graduation, he intended to resume the full-time practice of law.

The Service's ruling. Because he had practiced law full-time for a substantial period, would continue to work with clients (albeit on a limited basis) and planned to make a reasonable effort to resume the practice of his profession (by intending to return and by making a good-faith effort to return), the Service characterized the taxpayer's time in school as a temporary absence from his trade or business and allowed a deduction for the costs of his studies.

Observations. First and foremost, the key to the taxpayer's success centered on the fact that he was actually involved in a trade or business when he made the decision to attend school (and incur the costs). In addition, the time to be spent in school was less than a year (and therefore "temporary") and had a determinable beginning and end. (Thus, it was not considered an indefinite absence.) Equally important was his intent (as evidenced by his reasonable efforts) to return to basically the same trade or business once he had completed his schooling. And as long as the courses he took improved the skills required for his professional practice (rather than qualifying him for a new trade or business), the major obstacle usually present in these situations was avoided.

For a discussion of this and other rulings and cases, see the "Tax Trends" department, in the June 1991 issue of The Tax Adviser.

-Nicholas Fiore, editor

The Pax Adviser
COPYRIGHT 1991 American Institute of CPA's
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Copyright 1991, Gale Group. All rights reserved. Gale Group is a Thomson Corporation Company.

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Author:Fiore, Nicholas J.
Publication:Journal of Accountancy
Date:Jun 1, 1991
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