Education Expense as Trade or Business Deductions: Part Two

Shah v. Commissioner, T.C. Summ. Op. 2010-6 (2010).

Question for the Tax Court

May a taxpayer deduct education expenses as trade or business expenses when the education expenses directly related to the taxpayer's existing trade or business, but were part of a program of study that led to a new trade or business?

Background

During the years at issue, 2005 and 2006, Mr. Shah was an undergraduate student at New York University (NYU), where he majored in film and television studies. (3).  To meet his graduation requirements he was required to complete both the core courses of his major and elective courses from other fields of study. (3).  A substantial number of the elective courses . . . were in computer science, web design, and multimedia. (3).

While attending high school in Chicago, IL, Mr. Shah began performing information technology services for clients of his Dad's business. (3).  Part of the work involved working on websites for these clients. (4).  He earned between $5,000 and $10,000 during 2003 and 2004 providing these services. (3).

After graduating from NYU, he began working in the entertainment industry . . . creating multimedia content for his employer's website. (4).

On his 2005 and 2006 tax return, Mr. Shah deducted the costs of the classes he took at NYU that related to his trade or business as a website designer while in high school. (8).

When are Education Expenses Deductible as a Trade or Business Expense?

The Tax Court does not recite the applicable regulations in their opinion, but they are helpful for the analysis so I have provided them below.

Regulation 1.162-5(a) states in part:  [e]xpenditures made by an individual for education . . . are deductible as ordinary and necessary business expenses (even though the education may lead to a degree ) if the education -

(1) Maintains or improves skills required by the individual  in his employment or other trade or business, or

(2) Meets the express requirements of applicable law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status, or rate of compensation.

Exceptions to the General Rule

Regulation 1.162-5(b)(2) states in part:  The first category of nondeductible educational expenses . . . are expenditures made by an individual for education which is required . . . to meet the minimum educational requirements for qualification in his employment or other trade or business.

Regulation 1.162-5(b)(3) states in part:  The second category of nondeductible education expenses . . . are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business.

Argument Made by Taxpayer

Petitioner maintains that he deducted only tuition and book costs for those classes related to his computer work.  (7).  Specifically, petitioner posits that since he was employed in Web design and multimedia while in high school, classes he took at NYU related to those fields should be considered to be qualifying work-related education that improved skills and not a program of study that qualifies him for a new trade or business. (8).

Tax Court's Holding

While his computer and Web design courses may have improved his skills, they also helped qualify petitioner for a new trade or business. (8).  These courses were necessary for him to earn his bachelor's degree since he could not have graduate from NYU without those credits. (8).  Therefore, these courses were part of a course of study that will lead to qualifying petitioner in a new trade or business. (8).  As we stated in Warren v. Commissioner, supra:  "what is important under the regulations is that the degree 'will lead' petitioner to qualify for a new trade or business. (8) citations omitted.  Consequently, we hold that petitioner may not deduct his tuition and book expenses for 2005 and 2006. (8).

Blog Comments

The Court reached the right conclusion, but for the wrong reason.

The Court concludes that Mr. Shah's bachelor's degree qualifies him for a new trade or business different from his web design trade or business, but they don't say what that new trade or business is.  In reaching this conclusion, the Court places emphasis on the fact that Mr. Shah could not graduate NYU without the credits in website design and multimedia classes.  I suppose the inference we are meant to draw from this point is that education leading to a bachelor's degree in XYZ implicitly qualifies the taxpayer for a new trade or business.

However, this ignores the first sentence in the regulation that allows a deduction for education expenses "even though the education may lead to a degree."  Based on the first sentence of the regulations, it would seem irrelevant then that the credits in web design and multimedia classes were required to graduate from NYU.  In fact, if this were the standard, almost every type of secondary education expense would be nondeductible as trade or business expenses.

The Court should have placed their emphasis on the type of bachelor's degree Mr. Shah was pursuing, "film and television studies."  The Court then could reasonably hold that "film and television studies" qualified Mr. Shah for a trade or business different from web design, namely "film and television."  Mr. Shah points out, however, that he only deducted the courses that specifically related to his web design trade or business.  But the Tax Court correctly responds that the regulations exclude education expenses that are "part of a program of study that qualifies him for a new trade or business."  Mr. Shah's web design classes were "part of a program of study".

Separately, the Court might have focused on the first category of nondeductible education expenses, those that "meet the minimum requirements of his employment or other trade or business."  Presumably, Mr. Shah's bachelor's degree "meets the minimum requirements of . . . [an] other trade or business."

Comments

[computer service orange county]

I have a sole proprietorship. When I do my taxes, I am going to calculate all my business deductions. However, is this separate from the standard income tax deduction. Can I still take the standard income tax deduction along with my business deductions?

[Chris]

Yes, because you are sole proprietorship, your business deductions are separate from the standard income tax deduction. If you were taking business deductions as unreimbursed employee business expenses, then the business deductions would be in lieu of the standard income tax deduction.

[michael]

deducting education expanses as business does not seems sound idea because business income calculation gives a complete different scenario.

[Prefabrik]

"Every advantage has its tax."
Ralph Waldo Emerson