Reg § 1.162-5.pdf - Welcome to Luca globe The CPA Journal Online Main Menu CPA Journal Current Navigation Feb 1990 Educational expense deductions the

Reg § 1.162-5.pdf - Welcome to Luca globe The CPA Journal...

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Welcome to Luca! globe The CPA Journal Online Current Navigation Main Menu CPA Journal FAE Professional Libary Professional Forums Member Services Marketplace Committees Chapters Search Software Personal Help Feb 1990 Educational expense deductions: the maze of tests. by Daughtrey, Zoel W. Abstract- Certain educational expenses may qualify as income tax deductions under Reg. Sec 1.162-5 provided that the education meets the minimum requirement of the present business or trade of the taxpayer or qualifies the taxpayer for a new business or trade. The deduction will be allowed if the education was mandated by legal or employer-imposed requirements for retaining employment status or compensation rate or if the education was necessary to maintain or improve skills required in the taxpayer's business or trade. Under Sec 162, educational expenses are considered a business or trade expense if they are ordinary and necessary to carrying on a business or trade. The taxpayer must be carrying on a business or trade at the time the expense is incurred and the expense must have a direct and proximate relationship to the business or trade. In today's business and professional environment, many taxpayers seek further education to increase their employment skills. The reference to check whether related educational expenditures qualify as a federal income tax deduction, is Reg. Sec. 1.162-5. To qualify, the expenditures must first meet the trade or business expense requirements of Sec. 162. If so, the expenditure is tested against two "disqualifying" tests which prohibit the deduction where the education either: 1. Meets the minimum requirement of the taxpayer's present trade or business; or 2. Qualifies the taxpayer for a new trade or business. If the education survives the disqualifying tests and meets the Sec. 162 requirements, the next step is to meet one of the qualifying" tests. Expenditures will pass the qualifying tests if incurred either: 1. To meet express legal or employer-imposed requirements for the taxpayer to retain employment status or rate of compensation; or 2. To maintain or improve skills required in the taxpayer's trade or business. Trade or Business Expense Educational expenditures will be considered a Sec. 162 trade or business expense if they are ordinary and necessary in carrying on a trade or business. The two key tests under Sec. 162 are: 1) whether the taxpayer actually has a trade or business when the expenditure is incurred, and 2) whether the expenditure bears a direct and proximate relationship to that trade or business. Trade or Business A taxpayer must have a trade or business (including that of an employee) at the time of the expenditure. Expenditures incurred during temporary leaves of absence from a trade or business may, nevertheless, qualify. As to the meaning of the term temporary," disagreement often arises between the IRS and the Tax Court.
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  • Spring '14
  • JeffreyJ.Bryant

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