New York is Auditing Federal Tax Issues: Work Related Education Expenses
This article originally appeared in the May 2018 TaxStringer and is reprinted with permission from the New York State Society of Certified Public Accountants.
The New York State Tax Department has increased their audits involving federal tax issues. This may be due to a reduction in IRS audit personnel, but regardless of the reason, these issues affect both federal and New York State taxes and they therefore have the right to audit. Among some other issues, New York has been taking a look at the itemized deduction for work-related education expenses under IRC section 162.
You are able to deduct work-related education expenses paid during the year as an itemized deduction if your expenses are for education that
maintains or improves your job skills or
that your employer or a law requires in order to keep your current salary, status, or job.
In a simple case, if you have a job in computer programming and you take a course to learn a new programming language that you need to either maintain or improve your skill level, the education expense is deductible. The course can be required by your employer or by law, or it can be taken on your own accord.
The expense, however, will not be deductible if the education
qualifies you for a new trade or business or
is needed to meet the minimum educational requirements of your trade or business.
Your job or profession is considered your trade or business.
Expenses that you can deduct include:
tuition, books, supplies, lab fees, and similar items,
certain transportation and travel costs,
other educational expenses, such as the cost of research.
Self-employed individuals would include education expenses on their Form 1040 Sched. C.
A clear example of a nondeductible expense is if you are a programmer and you go to law school. That qualifies you for a new trade or business and is therefore not allowed. The same is also true if you go to school so that you qualify for a higher position in your company—that is also considered a new trade or business. Remember, the education expense is allowed if it improves your skills in your current position—not if it qualifies you for a new, higher position.
The common example of someone going to college to earn a degree in order to enter the workforce is obviously not deductible. This also applies if you are hired into a position where you have not yet met the minimum requirement for the position. For example, a teacher is required to have a master’s degree; however, he or she may be hired prior to obtaining the master’s degree with the expectation that he or she will have it within five years. The expense for the master’s degree is not deductible because it is the minimum education requirement of that trade.
Although the education must relate to your present work, education expenses incurred during temporary absence from your job may also be deductible. See Kopaigora v. Commisioner: In this case a master’s degree and a temporary absence was allowed.
After your temporary absence, you must return to the same kind of work. Absences from work for one year or more for education purposes may be considered acceptable on a case-by-case basis. It is less ambiguous if you return to the same position, but it is possible to return to the work force in a new position, as long as the new position is at the same level. This, however, could be hard to prove.
I was engaged with a case that involved someone in the investment field who left this job to complete his master’s degree. About a year later, he obtained a position with a different company. These facts were problematic in the mind of the auditor. Leaving one job to complete a master’s and then obtaining a new job could easily lead someone to believe that the master’s qualified the individual for a higher-level position, making the expense nondeductible. To qualify for the deduction, both the old and new position had to be on the same level. In fact, even if the new job was at the same level, the important consideration was if the degree would qualify him for a higher level.
The New York State Audit Division went so far as to contact both the past and present employer to learn the requirements of each position, wanting to ensure that both positions were on the same level and that a master’s degree was not required for either position, which it found to be true. They also found that employees in that field would obtain a master’s degree to improve their job skills, making this a properly deductible education expense. I appreciated the tax department’s diligence in doing the work necessary to arrive at a proper determination.
If you have any questions on this or any other state tax audit issue, feel free to contact the author.