New Court Decision Allows MBA Tax Deductions
Thanks to a recent court decision in the case of Kopaigora VS Commissioner of Internal Revenue, students enrolled in an MBA program—particularly an Executive MBA—can now deduct more education expenses from their taxes. While the case can’t be appealed or formerly cited as precedent, there’s no doubt that the outcome will be influential for the IRS and MBA students all over the U.S.
It’s a big win considering the fact that in 2015, around 12,000 students were enrolled in an Executive MBA program according to the Executive MBA Council, and 75% of those students paid for all or part of their expenses. To give you an idea of what this decision could mean for you, first, we have to discuss the case.
The Kopaigora Case
It all started when Alex Kopaigora, a 42-year-old Executive MBA student at Brigham Young University, decided to deduct $18,879 from his taxes for tuition and commuting. Unfortunately for Mr. Kopaigora, the IRS didn’t agree with his tax return. They cited the fact that he was unemployed for several months of that year as a reason to come after him for thousands of dollars. But when the case was brought before a judge, the IRS lost and the Kopaigoras were able to save $2,111 on their taxes.
However, it wasn’t an easy win. Unlike many other taxpayers in Tax Court, Kopaigora was represented by a lawyer who provided the expert representation he needed. When speaking with The Wall Street Journal, Mr. Kopaigora said, “I knew the deductions were legitimate, but the IRS just disallowed them. Most people give up and write a check, but I had a little more grit.”
So, why is this decision in Tax Court so important? It changes a precedent.
Before the Kopaigora case, there were countless examples of tax court cases where the MBA student came out on the bottom. For example, Adam Hart, a Rollins College MBA, lost his $17,138 tax deduction in 2009 when the Judge pointed out that Hart wasn’t required to get an MBA by his employer and that he was not consistently “carrying on a trade of business.”
While there’s no clear reason for Hart’s loss and Kopaigora’s win, it all comes down to Tax Law.
Tax law can be a complicated business with many intricacies. The current rules don’t allow education costs to be reimbursed as business expenses if the courses prepare the student for a new type of business or license, such as in the case of a law degree or nursing. In fact, tuition is only considered deductible for three reasons:
- When it improves or enhances the skills necessary for your job or business
- When an MBA is a requirement requested by your employer or for regulations
- When the education is related to the trade of business you are “carrying on,” meaning you need years of previous experience and must plan to return to the same career.
For years, the law’s wording has meant that many taxpayers in undergraduate and graduate school can’t take deductions—although other tax benefits offset some costs. However, it has always been more complicated for MBA students. Since many MBAs have jobs before enrolling in their MBA program and are only seeking to “maintain or improve” their skills, and the MBA doesn’t lead to a license, many students qualify for a deduction. But up until this point, the IRS has challenged many MBA deductions and used fine distinctions to make their point. For example, the IRS has fought back against deductions from MBA students who decided to switch career fields after graduation.
Now, thanks to one judge’s decision to rule in favor of MBA students, MBA deductions could become a whole lot easier.
How Will the Results Affect MBA Tax Deductions
There are two main ways the ruling in the Kopaigora VS Commissions of Internal Revenue case will help MBA students.
- First, Executive MBA students now have a precedent of justification for their education deductions.
- Second, unemployed MBAs will be able to deduct their education as “unreimbursed business expenses.”
Both of these points are good news for taxpayers. Now, Full-Time MBA students will have an easier time counting their education as a deduction, and Executive MBAs can point to another case where a deduction was allowed.
Still, the question remains for many MBA students: to claim or not to claim. According to Robert Willens, a tax expert at Columbia University’s business school, “This case is a big win for all M.B.A. students. Now it’s harder for the IRS to say that being in a full-time program bars the deduction.”