Education expenses are tax deductible IF… The education costs are:
(1) Required by your employer or by law to keep your job, OR
(2) Needed to improve your skills you use at your current job.
- Medical Doctor is required to take continuing education courses each year to keep her medical license under state laws. These education costs are tax deductible.
- Salesperson attends a seminar to improve his negotiating skills at his current job. These business education costs are also tax deductible.
- Real estate agent/broker attends a seminar on advanced real estate strategies to improve the representation of her clients. This seminar would be tax deductible.
- Bookkeeper takes a class on finance to improve his job skills. This class would be a tax deductible education expense.
- Motorcycle repair mechanic attends classes to learn about maintenance on new models, which improves his skills at his current job. These costs are also tax deductible.
They are not tax deductible IF… The education costs are:
- Needed to qualify you for a new trade or business, OR
- Needed to meet the minimum requirements for your business.
- College graduate decides to enter medical school. The new education (medical school) qualifies her for a new trade (being a doctor). Thus, these costs are not tax deductible.
- Accountant is required to be a CPA before he can work at XYZ accounting firm. The costs of preparing for and taking the CPA exam are to meet a minimum standard for his job at XYZ and are also not tax deductible education expenses.
Real Estate Training/Seminar/Education Expenses
Some Examples for Claiming the Tax Deduction:
- Don is a school teacher in 2016 and decides to begin buying rental properties for long-term investments. He attends a seminar in July 2016 on how to buy rental real estate. In March 2017, Don buys his first rental property and makes it available for rent in May 2017. Don was not in business when he incurred the seminar expenses and thus these are not currently tax deductible.
- Don is a school teacher in 2016 and decides to begin flipping real properties (short-term real estate deals). He sets up a business entity in May 2016 and begins his diligent search for real estate deals. He makes an offer or two but no deals. He attends a real estate class for real estate dealers in August 2016 and subsequently closes his first deal in December 2016. Because Don was in business when he incurred the seminar expenses, these would be tax deductible.
- Don is a real estate broker/agent in 2016. He takes additional real estate classes in 2016 to help to better serve his clients. These class costs would be tax deductible business education expenses.
- Don is a real estate broker/agent in 2016. The State of Nevada requires him to take real estate classes to maintain his realtor’s license. These class costs would be also be tax deductible.
Real Estate Education Expenses (the “Woody” Tax Court case)
FACTS: Thomas Woody started researching the real estate market (early in 2004) so that he could begin to purchase real estate for investment and/or rental purposes. He created a name and business plan for his sole proprietorship and began marketing his services via business cards/flyers, etc. By October 2004 and without any success, Mr. Woody paid $21,490 to a company for certain real estate training classes, which he subsequently attended. He bought his first rental property on December 30, 2004, and began renting the property later in 2005.
LAW: The Tax Court had to first determine when Mr. Woody’s real estate business actually began to operate to determine if the training/education expenses would be tax deductible. The Court determined that his business did not actually commence until he purchased his first property in December 2004 (at the very earliest and perhaps not until as late as it was actually rented in 2005). But in any case the business was NOT in place when he incurred the training expenses in October 2004. Without a business in place before incurring the expenses and given that these expenses prepared Mr. Woody for a new career, the Court determined that they were non-deductible personal expenses.
The “Woody” TAX TIP: Have a business in place and actually commence business operations BEFORE incurring any training-related expenses in order to make the expenses tax deductible for your business.
Some other tax considerations:
- If the business education expenses are not currently tax deductible, they may qualify as start-up expenses for the business entity and may be deductible via amortization as such.
- You must determine when the real estate business “started.” This may be completely different depending upon the type of real estate activity that you are pursuing. For instance, a landlord is not typically “in business” until a rental property is actually purchased and made available for rent. However, for a real estate “dealer” (wholesalers/flippers), the business likely will begin as soon as you begin the process to secure a property.
- If you qualify as a “real estate professional,” your expenses relating to real estate seminars, classes, conferences, etc. will be tax deductible education expenses.
- If you are audited on this issue, good records are an absolute requirement before the IRS will allow the deduction. You must keep a diary or log of expenses, together with supporting documentation, such as receipts, canceled checks, credit card statements and/or similar records. The diary should indicate the dates you left and returned on each trip for further education, the number of days or amount of time spent on education during each trip, the destination of the trip and the business purpose.
- The tax law is often unclear on if (or when) seminars/conferences/classes can be deducted as an ordinary and necessary business expense. As long as you don’t fall into one of the obvious non-deductible categories (for instance attending law school to enter a new trade or profession) and you have excellent records for proof of the actual expenses, it is your decision on whether (or not) to claim the deduction!
- If you determine that you can deduct your business education expenses, you are permitted to claim deductions for the registration fees for the class/conference, along with any travel, automobile, meals, lodging and any other reasonable expenses related to the education/training.
For more information on education expenses, please see IRS Publication 970, available at www.irs.gov.