By Patrick Temple-West
WASHINGTON (Reuters) - The U.S. Tax Court has dealt a setback to young MBA students with little work experience who try to claim their tuition costs as a tax-deductible business expense, lawyers and accountants said on Thursday.
In a ruling on Monday, a Tax Court judge denied Adam Hart of Florida, who was studying for a Master of Business Administration degree in finance, a $17,138 tax deduction he claimed for his tuition costs in 2009. The IRS billed Hart for $2,572 in unpaid taxes.
Hart, now 31, who graduated in 2011 from the Rollins College MBA program in the state, did not have enough consistent work experience prior to starting school to claim the deduction, the judge ruled.
"There is no evidence in the record that (the) petitioner was carrying on a trade or business before he enrolled in the MBA program," wrote Tax Court Judge Kathleen Kerrigan.
Claiming MBA tuition as an ordinary, cost-of-business deduction is a narrow needle to thread, tax professionals said. The tax break cannot be claimed by law or medical students.
MBA students may be able to convince the IRS their education is an expense if they have years of consistent experience built up before starting a program, and then return to that career after graduation, professionals agreed.
The Tax Court decision will prevent MBA students without an established career path from claiming the tax break, lawyers and accountants said.
"Given where we are economically, it may be more difficult for younger professionals to establish themselves in careers. This in turn could make it more difficult to take advantage of the deduction," said John DeBoy, a tax lawyer at Covington & Burling LLP.
Tax and accounting expert Robert Willens, who teaches MBA classes at Columbia University, said the tax break accounts for about one-third of the tuition cost a year for the students he knows who have been able to claim it.
Following Hart's Tax Court loss, "the IRS could decide to read it more broadly than it should be read and begin challenging people," Willens said.
Josh Nowack, an accountant in California, said he does between 30 and 50 tax returns a year that claim MBA tuition as a business expense. Students in high-tax states like New York and California can save between $5,000 and $10,000 with the MBA tax break.
He said a strong candidate for the tax break is an engineer, for example, who has worked for 15 years then gets an MBA to broaden his or her career opportunities.
But for Hart, who started his MBA program two years after receiving an undergraduate degree, the Tax Court ruling "was not surprising," Nowack said.
In an interview on Thursday, Hart said he would ask the Tax Court to reconsider his case with new evidence that shows he had more work experience before starting the MBA program.
Hart said he works now for McKesson Corp, a drug wholesaler, as a sales representative. He said he could owe the IRS up to $10,000 if he ultimately loses his case.
"I'm fighting this all the way to the end," Hart said.
(Reporting by Patrick Temple-West; Editing by Howard Goller and Jonathan Oatis)