NFIB

Your Assignment: Write Off Your MBA
03/ 07/ 2006
by Karen Bannan

Think an MBA could help you make better decisions in your small business? A United States Tax Court ruling last August could make that advanced degree more affordable, saving small-business owners thousands on their taxes each year.

In 2001, Daniel R. Allemeier, who was employed as a salesperson, deducted $17,500 of tuition expenses and $231 worth of parking fees as Unreimbursed Employee Business Expenses. The Internal Revenue Service mailed Allemeier a notice in 2003 that he had underpaid his 2001 federal income tax by $4,872. The notice cited the fact that MBAs, according to previous rulings, were not deductible because they help degree holders qualify for positions outside their jobs. The IRS had also ruled in the past that educational expenses can also be disallowed when they help someone meet minimum education requirements for their current position. Allemeier took the case to court.

The supporting memo that came out of the hearing, which was handed down last August, reverses the court’s previous stance, allowing Allemeier’s original deductions to stand. The court ruled that his business didn't change significantly after enrolling in the MBA program, and that he proved his work still involved the same general activities—sales, marketing and management— that he performed before enrolling in the program.

So does this mean that small-business owners can run out and get their own tax-deductible MBA? Possibly, says Bill Smith, director of CBIZ Accounting, Tax, and Advisory Services’ national tax office in Bethesda, Md.

“For small-business owners, there’s a very good argument that, if they get an MBA, it would be deductible. Likewise, we see a lot of small businesses passed on from generation to generation. The deduction would be especially good there, too,” he says. “This ruling sets a precedent.”

To date, the IRS hasn't appealed the court’s findings, but that doesn't mean it won't take on the issue again in a different city or state. “I would say it’s going to be the IRS’s position that the ruling doesn't change existing law,” Smith says. “I think they are going to let this case sit and try to take a case to court that’s factually in their favor to establish a brighter line. Most business owners are entrepreneurial and may be willing to assume that risk.”

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