As a small business owner, the breadth and depth of areas related to running a small business seem so broad and varied. Business owners are called upon to understand operations, finance, selling, people management, leadership and more. So, how does a business owner maximize the tax efficiency of those education costs?
The Internal Revenue Service (“IRS”) lays out two primary tests to meet the definition of qualifying work-related education expenses:
- Education is required by your employer or the law to keep your present salary, status or job and serve a bona fide business purpose of the employer
- Education maintains or improves skills needed in your present work
Let’s unpack these two tests and apply it to some real life examples.
Required by employer or law
Continuing education requirements are a regular part of many professions. These education related expenses that qualify for those continuing education credits clearly meet the requirement of the law.
Education expenses required by your employer that serves a business purpose is where the business owner has some freedom and latitude to define this requirement. As previously mentioned, business owners are called on to have a knowledge set in a variety of areas important to a business. The skills, background, perspective and insight all help shape a business owner’s ability to learn and acquire the knowledge necessary to lead a business. As many of us have discovered, the way we learn and acquire knowledge today is more than simply in a classroom setting. Team building exercises, online courses, self-discovery events all expand our learning and understanding. As such, these expenses that have a bona fide business purpose meet the criteria for work related education expenses.
Maintains or improves skills in your present work
Business owners need to acquire certain skills at different times in their professional careers. We also experience ongoing change in our present work – it’s part of our DNA as entrepreneurs and business builders, so here again, business owners can utilize creative education platforms that work for them in improving their skills.
Finally, work related education costs are broad and can even take place while on temporary leave and even lead to a qualified degree and still be deductible. As a business owner, you are given great opportunity here to be tax efficient with your ongoing work related education costs – use this to your professional career advantage and use the tax efficiency of these business deductions to minimize your overall expense.