Claiming my MBA on form 2106

[Rusoarmo]

In 2015 I paid approximately $20k out of pocket and $20k in loans for my MBA program.

I took a new job in November that is in the same industry (went from "specialist" to manager). Essentially a promotion.

I have a letter from my Director's manager (CRO) stating that my employment and position are contingent on me completing my MBA and they are not reimbursing me for any of my education expenses.

I want to claim $40k in education expenses on a form 2901 for my taxes, my income last year was ~75K. Spoke to 2 CPAs.

CPA 1: Sounds/looks good to me. I don't foresee any issue, they've got bigger fish to fry than to try to prove that you're not legitimate. Even if they do decide to audit it and claim that an MBA gives you new opportunities, you have a solid case.

CPA 2: This is rather aggressive and I would not recommend it.

TurboTax (premium or whatever with audit guarantee): You have a very low chance of being audited. By paying for the "extra" features it also insures that if audited they will provide legal support.

The difference in my return is appx. $7k if I claim it.

Any opinions? Anyone done this or something similar?

[gluskap]

There are other tax deductions for educational expenses namely the American Opportunity Tax Credit and Lifelong Learning Credit.  To claim it as a business expense is highly questionable and I think you know this.  Now it seems to me the question you are asking is more will I get audited and caught?  And yes the chances of getting audited are really low but do you want to risk it?  If you normally don't claim such a high business deduction then it might get flagged.  The question is, is $7000 worth it?  That's a question only you can answer.

[Rusoarmo]

There are other tax deductions for educational expenses namely the American Opportunity Tax Credit and Lifelong Learning Credit.  To claim it as a business expense is highly questionable and I think you know this.  Now it seems to me the question you are asking is more will I get audited and caught?  And yes the chances of getting audited are really low but do you want to risk it?  If you normally don't claim such a high business deduction then it might get flagged.  The question is, is $7000 worth it?  That's a question only you can answer.

My income is too high apparently to claim the Lifelong Learning Credit.

As for the "questionable" part, yes I am worried about being audited. I do believe I reasonably qualify to claim this because it is required education for me to maintain my position and salary. I am established in my line of work and it clearly maintains and improves my already existing skills.

My only real concern is if audited, the IRS could try to argue that an MBA "Is part of a program of study that will qualify you for a new trade or business."

[jwright]

CPA here.  I think it may raise a red flag, but you have a sound argument on your side.  The IRS has tried to argue that an MBA always trains you for a new profession, but the tax court has not always agreed.  The chances of you getting audited are slim (just saw an article about the continued decline in the volume of audits the IRS performs).   And this is all a facts and circumstances grey area.  If a teacher gets an MBA and goes into banking - obvious new business and not deductible.   If a banker gets an MBA and returns to banking - more likely deductible; and then there's all the grey area in between.  There simply is no clear definition.

 
How long did you work in this same business before getting the MBA?  The IRS wants to see several consistent years of experience to be "carrying on".  Probably more than two.    The Hart case was denied the deduction because the tax court judge ruled he wasn't established in his field before pursuing the MBA.

Is the letter from your new boss (?) saying that the MBA is a minimum requirement of the job (if so you can't take the deduction)?  Or are you with the same company?  This is the most unclear part to me.

Based on assumptions I have made from reading your post; I would take the deduction but of course I'm not signing your return.

[Rusoarmo]

CPA here.  I think it may raise a red flag, but you have a sound argument on your side.  The IRS has tried to argue that an MBA always trains you for a new profession, but the tax court has not always agreed.  The chances of you getting audited are slim (just saw an article about the continued decline in the volume of audits the IRS performs).   And this is all a facts and circumstances grey area.  If a teacher gets an MBA and goes into banking - obvious new business and not deductible.   If a banker gets an MBA and returns to banking - more likely deductible; and then there's all the grey area in between.  There simply is no clear definition.

 
How long did you work in this same business before getting the MBA?  The IRS wants to see several consistent years of experience to be "carrying on".  Probably more than two.    The Hart case was denied the deduction because the tax court judge ruled he wasn't established in his field before pursuing the MBA.

Is the letter from your new boss (?) saying that the MBA is a minimum requirement of the job (if so you can't take the deduction)?  Or are you with the same company?  This is the most unclear part to me.

Based on assumptions I have made from reading your post; I would take the deduction but of course I'm not signing your return.

Thank you for your insight!

No, the letter says that my employment with company X in position Y is contingent on me completing my MBA and that the company will not be paying or reimbursing me for expenses accrued in the pursuit of getting the MBA. Nothing about minimum requirements.

I began my MBA in January of 2015 and will graduate in June of 2016. I had been working combined over 2 years in the same exact line of work. In November of 2015, I took a job with a new company. The position I took however is a higher level of the work I was already doing. Essentially went from Operations Specialist to Operations Manager.

Edit: I should also add that my undergrad degree is also Business Administration which I received in 2012.

[Midwest]

You are taking a $40,000 deduction on schedule A via 2106 on $75,000 of income?

Make sure you have a defensible position.  There is a strong likelihood you are getting questioned on that.  If it was buried on schedule C, your audit risk would be lower but it sticks out like a sore thumb on schedule A.

Prior posters are correct that audit risk is generally low, but that will fall completely outside their statistical model.

MW

[Rusoarmo]

You are taking a $40,000 deduction on schedule A via 2106 on $75,000 of income?

Make sure you have a defensible position.  There is a strong likelihood you are getting questioned on that.  If it was buried on schedule C, your audit risk would be lower but it sticks out like a sore thumb on schedule A.

Prior posters are correct that audit risk is generally low, but that will fall completely outside their statistical model.

MW

Position is defend-able. There isn't anything fishy going on here, nothing illegal. I am legitimately working full time, paying for an MBA with no support from my current employer. My employer also requires that I finish the MBA I am in.

My concern was the "MBA trains for new profession" portion however since there is precedence in tax court that this is not always the case, I'm feeling much more comfortable that this should go over smoothly. I spoke with an acquaintance that claimed this for all 3 years of their MBA, no issues with the IRS. The fact Turbo Tax offers "Audit Defense" is also reassuring.

[felizcortez]

I worked full time and pursued my MBA part time.  I claimed my MBA on my tax return for the 3 years that I was in school.  I deducted the full amount of tuition, plus books etc.  I was recently audited by California for hte large deduction (over 35k) and sent them a copy of the tuition statements and they ended their audit and I kept the deduction.  No additional Tax Owed.

Will send you a PM with a link that might be helpful.