Are MBA Students Entitled For Tax Benefits In The US?

Is an MBA student part of the workforce entitled to tax benefits though he may remain unemployed for the duration of the program? This question came up during a tax dispute case in the United States.

Much to the relief of the student and in a decision that may benefit at least some those in a similar situation, the Tax Court ruled in his favour, allowing deduction of degree related expenses, including tuition.

Alex Kopaigora had joined the EMBA program at Brigham Young University’s Marriott School of Business in 2011. He had been coming every two weeks to Utah for the classes from Los Angeles where he was working.

He and his wife Elizabeth sought to deduct $18,879 on their 2011 tax return for tuition, commuting, and other expenses. However, the Internal Revenue Service (IRS) raised objections that Kopaigora remained unemployed for several months after losing his job at the Marriott Hotel in Los Angeles International Airport.

Rules of Engagement

The IRS also cited a rule (Section 162) that for education expenses to be deductible, a taxpayer must be “presently engaged” in related trade or business.

The Tax Court judge, however, ruled that Kopaigora had sought employment after losing the job and managed to land another one at a  California-based finance firm after graduating. So he remained entitled to the deductions. The ruling saved Kopaigora approximately $2,111.

Fringe benefits?

The court ruling allowing the deduction despite the student not having held a job for a substantial period comes as a boost for other MBA students. The IRS had been using the rule about “gainful employment” to claim the deduction to deny relief to them.

The court seems to have accepted the argument that business school is only a “temporary cessation or a hiatus in the conduct of the trade or business.” The break will end with the student returning to the trade or business after graduating.

It also takes into consideration the students’ intention to resume the trade or business as soon as they completed the program.

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However, while like all the tax court cases, this particular case cannot be appealed, it cannot be used as a precedent. There are no shortage of cases where the IRS would be able to marshal facts in its favour and win, experts say.

What does the rule say?

Section 162(a) of the Internal Revenue Code states: “There shall be allowed as a deduction all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business”.

This, in effect, means that the education must be related to a trade or business which you are “carrying on.” It must not be a minimum educational requirement for qualification in your trade or business, nor can it qualify you for a new trade or business. The education must maintain or improve skills needed in your profession. (Image Courtesy :pixabay.com)