U.S. Tax Court Denies MBA Tuition Deduction

In a recent U.S. Tax Court decision, taxpayers were denied a deduction for the cost of tuition for a Masters of Business Administration (MBA) program.

Taxpayers, Adam Edward Hart and Lisa Denning Hart, claimed a miscellaneous itemized deduction on their 2009 tax return for Adam Hart’s MBA tuition of $18,600, reported on a Form 1098-T issued by Rollins College. After applying the 2% AGI threshold, the resulting itemized deduction for the taxpayers was $17,138, which resulted in a tax savings of $2,572.

Hart graduated from college with his undergraduate degree in 2007 and in January 2009 he enrolled in an MBA program with a concentration in finance at Rollins. In 2009, Hart worked for a few companies and was unemployed for a period of time while attending his MBA classes at Rollins.

The court’s position is that a taxpayer must be established in a trade or business for tuition costs to be deductible as a business expense under Section 162 of the Tax Code and IRS regulations. Hart argued that he was in the business of selling pharmaceuticals and that the MBA classes enabled him to obtain employment in 2009. The IRS contended that Hart was not established in a trade or business and that his employers did not require him to enroll in an MBA program.

Judge Kathleen Kerrigan found that Adam Hart was not established in a trade or business before enrolling in the MBA program and disallowed the deduction.

The taxpayers plan to appeal the decision. The ruling in this case will have serious implications for other taxpayers with little work experience who already have or plan on deducting tuition costs for their MBA program.