An MBA is deductible – or is it?
Recently, Northwestern University (Kellogg) graduate Tracy McEuen found out the hard way. After a high-profile battle with the IRS, a court issued a Tax Court Summary Opinion that her MBA expenses weren’t tax deductible, sending shivers down students’ spines everywhere (“M.B.A. Students May Lose Tax Break” by Jane J. Kim, The Wall Street Journal, August 17, 2004). Previously a financial analyst, McEuen accepted a marketing position after graduation.
Should HBS students be concerned?
“Nothing has changed,” said Lewis A. Weinstein, CEO of GenerationTax Corporation, a tax firm that specializes in MBA students. “The deductibility test is the same.”
Weinstein asks four questions in order to determine a student’s eligibility:
úFirst, is an MBA needed to meet the minimum educational requirements of your trade?
úSecond, will the MBA qualify you to work in a different business or industry?
úThird, is an MBA required to keep your present salary, status, or job?
úFinally, does an MBA maintain or improve the skills developed in your position before business school?
The second question is one of the most difficult because there are significant grey areas. One could argue that an MBA should qualify you to do something you weren’t doing before – otherwise why would you get one in the first place ? The key seems to be returning to the same job function after graduation, such as finance, even if it is in another industry.
If the majority of courses help the student to perform the function better, this meets the intent of the law. However, if most of the courses taken are in new disciplines it could be difficult to argue that existing skills have been enhanced. The students must be prepared to explain how their course selections fit the criteria.
Interestingly enough, Tax Man, a New England tax firm headed by Robert G. Murray (MBA, ’69), claims on its website that “Unless you were in a position without any managerial and/or business duties prior to studying for your MBA, an MBA does not qualify you for a new trade or business.” McEuen’s case appears to contradict the claim.
However, Weinstein says that the HBS curriculum lends itself well to the deduction test because the case method improves general decision making, management, and leadership skills, which were probably used heavily in students’ jobs before business school.
It isn’t known what proportion of MBA students are eligible to deduct their educational expenses, but of the students who have contacted GenerationTax after doing some preliminary research on their own, over half have qualified, says Weinstein.
Tax Man’s website states that “most” MBAs qualify for the deduction. The company includes a calculator for the curious student to calculate possible savings. www.taxman.com/tax_calculator
And the money can be significant. Expenses that may be deducted subject to the 2% rule on Schedule A include tuition, fees, cases, books, computer equipment and software if required by the school, and other miscellaneous expenses such as supplies.
Weinstein declined to say how many tax returns he prepares each year or what percentage of his clients get audited, but said it is virtually the same as the general population. Tax Man has had 44 audits out of “thousands” of clients, according to its website, with 42 wins and two compromises.
Editor’s Note: IRS publication 970, Tax Benefits for Education, is available for download at www.irs.gov/pub/irs-pdf/p970.pdf