This week, Gail explains the tax deductions available to employers who want to pay for their employees' education or training. And if your employer doesn't have an education reimbursement policy, you can get work-related education deductions on your own.
Gail,
Are there any tax deductions for a business to send an employee to a trade related school?
Thank you,
Brenda
Dear Brenda,
The short answer is "Yes." However, there are some rules you need to be aware of.
To qualify as a tax deduction, the education or training must be related to the job the employee currently has. According to David Binder, a CPA in Mars, Penn., it has to be something that "maintains or improves the employee's skills in his/her current job or be necessary for the employee to maintain his/her salary level." It would also include any education required by law.
For instance, say you run a private security guard service. If the state legislature passes a law requiring all licensed security guards to have a certain number of additional hours of training at the shooting range, you could deduct the cost of sending your employees for this. If you own an auto repair shop, you could deduct the cost of sending a mechanic to school to learn to operate a new piece of machinery. Companies frequently cover tuition costs for executives earning their MBAs.
Education expenses that qualify an employee for a new or unrelated trade or business are not deductible. (You can't hire your teenager and have your company pay for her college education while she works for you part-time.)
You also don't get a tax deduction if you're simply paying for someone to attain the minimum level of education required to qualify for their present job. For instance, if their job description calls for a high school diploma, but they only finished the 10th grade, you cannot deduct the cost of sending them to night school.
Larger companies, or those who simply want to make their tuition reimbursement policies clear to all employees, may adopt a formal education assistance program under Section 127 of the tax code. They key is that the plan be in writing and not favor only highly-paid employees. It has to be open to anyone.
In this case, the employer can reimburse up to $5,250 of education expenses per employee. These would be tax deductible as a business expense for the company and would not be included in the employee's taxable income.
But an employer can only reimburse an employee for tuition, fees, and supplies. (A company can be more restrictive if it wants to be. For instance, it might only reimburse tuition, leaving the cost of books up to the employee.) Travel expenses and meals are not reimbursable.
You may be asking yourself, "What if my company doesn't have an education reimbursement policy and I pay for additional training out of my own pocket?" In that case, many of the same rules apply.
Again, the key is that the course work be related to your current job. You can't be a construction worker by day and deduct the cost of earning your PGA certification on nights and weekends! But if you're covering your own education costs, and you are attending school on a temporary basis, you get to deduct mileage expense for computing to and from campus.
Be careful! The IRS has a very specific definition of "temporary." It only applies if "your attendance at school is realistically expected to last one year or less."
To take a tax deduction for work-related education expenses you have to itemize your deductions. They're lumped in under "Miscellaneous Itemized Deductions." Which means you'll only see a benefit to the extent the amount exceeds 2% of your adjusted gross income.
Check out IRS Publication 970 for more on the IRS Web site.
Whether or not your education is work-related, don't overlook other tax benefits for education expenses such as the Hope and Lifetime Learning tax credits.
Hope this helps,
Gail
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