Deducting Education Expenses for Employees and Owners
How to Deduct Education Expenses for Employees and Business Owners
Many employers provide educational benefits for employees. Some of these benefits are for continuing education, to maintain professional licenses, or to gain new skills, credentials, or degrees to benefit both the employee and employer. Self-employed business owners also may be able to deduct education expenses.
Education expenses are legitimate business expenses.
But there are still some qualifications that must be met before these expenses are fully deductible to your business.
Four questions are addressed in this article:
- Which of these benefits are deductible as business expenses?
- Which of these benefits are taxable to employees?
- How do I report taxable benefits on an employee's W-2 form?
- How do I include deductible benefits in my business tax return?
Employee Taxes and Education Expenses
For purposes of employee taxes, education expenses are included in the category of "working condition fringe benefits." The IRS has a specific definition for these benefits, which is that they are benefits that would be deductible to the employee on a personal tax return.
To be excludable from the employee's income as a working condition fringe benefit, all of the following must apply:
- The benefit must relate to employer's business
- The employee would have been entitled to an income tax deduction if expense had been paid personally (on Schedule A as "unreimbursed employee expenses")
- The business use must be substantiated with records. If you reimburse the employee in cash, you must require verification of the expense.
The cost of continuing education credits for employees is also included as a business expense if it meets these criteria.
In addition, the educational course must not:
- Be needed to meet the minimum educational requirements of the current job, or
- Qualify the employee for a new (different) trade or business.
Deductible educational expenses include books, tuition, and travel costs to and from school.
As usual with the IRS, this issue is complicated. See the IRS Employer's Fringe Benefit Guide for more information about qualification, limitations, and restrictions.
Independent contractors working for your business can be treated as employees for the purpose of this benefit. That means they may also exclude allowable education benefit expense payments from income. Their income would be reported on Form 1099-MISC.
Education Expenses for Self-employed Business Owners
As noted above, self-employed business owners can deduct costs for their own education, subject to certain limitations in the same way as individual taxpayers. You are self-employed if you own a business that is not a corporation (this includes ownership of an LLC or partnership as well as a sole proprietorship).
To be deductible, you must be able to show that the education:
- "Maintains or improves skills required in your present work," or
- It is required by law or regulations for maintaining a license to practice, status, or job. For example, professionals can deduct costs for continuing education.
Education expenses are not deductible if:
- The education is needed to meet the minimum educational requirements of your present trade or business. For example, you can't deduct the cost of obtaining a license to practice if you don't already hold such a license, or
- The education is part of a program of study that will qualify you for a new trade or business.
Where to Deduct Education Expenses on Your Business Tax Return
- For sole proprietors and single-member LLCs, show these expenses in the "Expenses" section of Schedule C
- For partnerships and multiple-member LLCs, show these expenses in the "Deductions" section of Form 1065
- For corporations, show these expenses in the "Deductions" section of Form 1120.
For More Information on Deducting Educational Expenses
William Perez, Tax Planning Expert, has a comprehensive article on how individual taxpayers can qualify for tuition and fees deductions.
For more information, see IRS Publication 970: Tax Benefits for Education, Chapter 12, Business Deduction for Work-Related Education.
This article about which employee benefits are taxable might also be helpful.
Disclaimer: This article presents general information; I am not a tax attorney or tax preparation specialist. Refer to IRS publications and discuss with your tax professional or employee benefits consultant.