The Wall Street Journal
By: Barbara Weltman
August 5, 2010
If you're a small-business owner seeking more training for yourself or for your staff, now is the time to enroll for the fall term. Fortunately, Uncle Sam helps defray the costs of education by providing important tax breaks.
Successful business owners often pursue higher education or take courses in sales, software or other specialized learning programs. What's the best way to write-off the cost of education that the owner pays for personally? It depends on several factors, including the type of education, the entity used by the business (such as a sole proprietorship or C corporation) and the owner's personal tax picture. Here's a short list.
Tax credits for higher education. Tax credits are better than deductions because they reduce taxes dollar for dollar. There are two personal tax credits that may be used for higher education:
--American Opportunity credit of up to $2,500 per year for the first four years of higher education. This credit is set to run only through 2010 and thereafter revert to the Hope credit of up to $1,800.
--Lifetime Learning credit of up to $2,000 per year for any higher education, including graduate courses.
The credits are subject to income limitations that may bar an owner from claiming them. If so, then costs may be deductible, without regard to income.
Deductions for education. Work-related education, such as continuing education required to maintain professional licenses, is a deductible expense. This includes not only tuition and fees, but also books and travel. For example, if an owner attends a business seminar at a resort location, it may be possible to deduct not only attendance fees but also travel, room and board. The key to claiming a deduction for all of these costs is showing the course is work-related and the purpose of the travel is to take the course and not for some personal reason; substantiation of attendance at the course is required.
Self-employed individuals can deduct these costs from business income even though they pay for them personally because the costs are viewed as business expenses (sole proprietors take the write-off directly on Schedule C of Form 1040; partners can subtract the expense on Schedule E of Form 1040). Owners with C or S corporations, however, are employees who can only deduct these costs as unreimbursed employee business expenses on Schedule A of their Form 1040; only amounts in excess of 2% of adjusted gross income actually become deductible.
Not every type of course or learning is tax deductible. The courses must maintain or improve job skills and not qualify the owner for a new trade or business. For example, costs of a law degree are not deductible because they qualify the student for a new trade or business, even if the student never intends to practice. Whether the cost of obtaining an MBA is deductible depends on the situation.
Businesses that pay for education for their staff can usually deduct all of their costs as ordinary and necessary business expenses. From the employee's perspective, some or all of this fringe benefit may be tax free.
--Up to $5,250 is tax free if the education is provided under the company's written education assistance plan, whether or not the courses are job-related. Because of certain rules, owners and their families generally can't take advantage of this tax break for themselves.
--All of the assistance is treated as a tax-free working condition fringe benefit if the courses are job-related. This break can be used by corporate owner-employees to obtain tax-free education paid by their corporations (although S corporation shareholders should work with their tax advisors to avoid problems that could threaten S status).
Businesses can set certain standards that employees must attain in order to receive this education assistance. For example, an employee may be required to pay upfront for a course and will receive reimbursement only if he or she receives a grade of B or better.
Owners who want to learn more about how to run a business need not spend a fortune on formal education. There are many free resources, and training can be done online at the owner's convenience, including:
--IRS offers virtual small business tax workshops at www.tax.gov/virtualworkshop and other online educational and learning products at www.irs.gov/businesses/small/content/0,,id=146331,00.html.
--SCORE offers online workshops at www.score.org/online_workshops.html.
--Small Business Administration (SBA)'s Training Network at www.sba.gov/training/index.html provides self-paced courses that run about 30 minutes each.
--Also find low-cost programs for business owners through Small Business Development Centers (www.sba.gov/aboutsba/sbaprograms/sbdc/sbdclocator/SBDC_LOCATOR.html) and local community colleges.
---Find more about deducting the costs of education in IRS Publication 970, Tax Benefits for Education, at www.irs.gov/pub/irs-pdf/p970.pdf.