With the costs of obtaining a Master of Business Administration (MBA) skyrocketing, often costing up to $80,000 or more, you might be wondering, “Is my MBA tax deductible?” As with most tax questions, the answer is not a simple one. It depends on the situation, and there are at least three possible options for receiving a tax benefit, which we will explore in this post.
First, it is worth mentioning that you may be able to qualify to claim the MBA expenses towards the Lifetime Learning Credit. The drawback with this credit is that it is limited to $10,000 of qualified education expenses per year, and your income must be below the income threshold for your filing status.
Second, you may be able to claim the MBA expenses as an above-the-line tuition and fees deduction. This deduction is limited as well, to up to $4,000 of qualified education expenses per year, based on your income threshold and filing status.
The third, and often most beneficial, option is to claim the MBA as a business expense deduction. There is no income threshold or filing status requirement for doing this. As an employee, you would claim the deduction as part of your miscellaneous itemized deductions on Schedule A, and only the expenses that exceed 2% of your AGI would be deductible, provided you are itemizing your deductions. If you are self-employed, you would claim the deduction as a business expense deduction.
But before claiming your MBA as a business expense deduction, you will need to make sure you actually qualify, as this is a frequently audited deduction − especially if the amount claimed is large. If your deduction is audited, the IRS is likely to take the position that your MBA qualifies you for a new occupation. If you cannot prove otherwise, you will lose the deduction.
In order to qualify to claim your MBA expenses as a business expense deduction, the MBA must either have been required by your employer or the law to maintain your present salary, status, or job, or the education must maintain or improve the skills needed in your present work. Generally, this means the education expense must be considered “ordinary and necessary” to your job or business. In addition, the education cannot have been completed merely to meet the minimum education requirements of your present job or business, or be a part of a program of study that qualifies you for a new trade or business.
The list of decisive factors that is used in determining whether an MBA qualifies as a business expense deduction generally includes all of the following:
- You were already established in your job or business;
- The MBA maintains or improves the skills used in your current job or business; and
- The types of tasks and activities you were qualified to perform before the MBA are similar to those you qualified for afterwards.
In the event of an audit, you will likely need to be able to show that you meet all of the above decisive factors. This can usually be done by providing a written narrative outlining specifically how you meet these requirements. If you are an employee, you will also need a letter from your employer that supports your position. School transcripts are also helpful, as you can use them to show how each individual course helped you maintain or improve your skills in your current job or business. Lastly, the fact that you may have received a promotion or pay raise in itself may not disqualify you, provided you can substantiate the decisive factors mentioned above. In other words, you must be able to show is that you are performing essentially the same duties before the MBA as after obtaining the MBA, and how specifically the MBA helped improve your skills to do your job better.
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