As a small-business owner, you probably incur work-related education expenses from time to time. You may even decide to pursue an advanced degree, such as a Master of Business Administration (MBA).
You likely want your employees to be on a path of continuous improvement.
There’s much to know about how such business deductions work for both you and your employees. The Tax Cuts and Jobs Act (TCJA) tax reform may trigger a need for you to change your strategy to help your continuous learning (likely your most valuable) employees.
Under the New Tax Law, Employees Deductions Get Hurt
Your employees will find this new rule beyond the “oh, shucks” reaction. For 2018–2025, the TCJA outlaws write-offs for miscellaneous itemized expenses that under prior law were subject to the 2 percent of adjusted gross income (AGI) deduction threshold.
Included in this category are unreimbursed employee business expenses. So for 2018–2025, employees may not take miscellaneous itemized deductions for unreimbursed work-related education expenses.
But…
If you want your employees to continue on their continuous learning pathways, you may now want to reimburse those employees for their educational expenses. The reimbursements can give you three benefits:
- You will have smarter, better employees who benefit your business because of their continuous improvement.
- You will have happier employees because you not only save them money by reimbursing them for their continuous learning, but also visibly show that you care about them.
- You deduct the education reimbursements.
If you operate your business as a corporation and you are an employee in your corporation, the corporation can reimburse you for your work-related education expenses. The education reimbursement is (a) tax-free to you, just as with any employee, and (b) a deductible business expense for your corporation.
Make sure that employees, including you, turn in their work-related education expenses on an expense report that includes proof of the outlays and why such expenses are business-related.
Deducting Your Work-Related Education on Schedule C, E, or F
If your business does not operate as a corporation, you are likely considered self-employed for tax purposes. As such, you can still claim deductions for business expenses—including work-related education expenses—on
- If you are a sole proprietor: Schedule C of Form 1040 ,
- For a rental activity: Schedule E ,
- If you are a partner: Schedule E , or
- For a sole proprietor farming or ranching activity: Schedule F .
This is favorable treatment because Schedule C, E, and F deductions reduce your federal income tax bill and, for other than the rental, your self-employment taxes, too. The education deductions also reduce your state income tax bill if you pay state income tax.
Key point. Federal tax law treats your single-member LLC as a sole proprietorship unless you choose taxation as a corporation. Multi-member LLCs are treated as partnerships for tax purposes unless the members elect corporate taxation. So when we refer to sole proprietors and partners, those terms include LLC members who are treated as sole proprietors and partners.
There are a number of rules that define what Work Related Education is to the IRS. Also there are specific rules and guidance on Tax Credits such as American Opportunity Credit and Lifetime Learning Credit.
If you would like my help with the education possibilities and deductions for you, your business, and your employees, call me on my direct line at 509-543-7600.