Education Expense Deduction under IRC §162: How Education Costs Can Become Tax Deductions

Professionals, business owners, and independent contractors often ask when education costs can be deducted. The answer turns on Internal Revenue Code (IRC) §162 and Treasury Regulation (Treas. Reg.) §1.162-5, which together permit an education expense deduction only in narrow circumstances. W-2 employees should note that their rules differ, and a later section of this article explains how they are treated.

The education expense deduction is not limited to traditional business owners. Independent contractors, freelancers, and other self-employed individuals earning 1099 income may also qualify if they are carrying on a trade or business. "Trade or business" under the Internal Revenue Code generally means an activity engaged in for income or profit with continuity and regularity (see Comm’r v. Groetzinger, 480 U.S. 23 (1987)). Importantly, the education costs do not have to be part of a degree program; costs for continuing education or professional certification can also qualify if they meet the two-prong test. 

Courts apply an objective, skills-based analysis. They ask what tasks a taxpayer was already qualified to perform. They then consider whether the education simply refines those skills or instead opens the door to a new trade or business. As case law shows, the outcome depends heavily on facts and context.

The Regulatory Baseline: The Two-Prong Test for Taxpayers in a Trade or Business

While the regulation lays out multiple tests, not all are relevant for taxpayers engaged in a trade or business. For purposes of deducting education expenses as a business expense, two prongs matter most:

1. The education must maintain or improve existing skills required in the taxpayer’s current trade or business.

   
   

2. The education must not qualify the taxpayer for a new trade or business.

Other regulatory provisions, such as those dealing with minimum educational requirements, typically apply to initial professional qualification scenarios and are not the focus here. The analysis below follows the two prongs listed above, with signposts to guide where each prong is being evaluated.

Prong One: Maintain or Improve Existing Skills in a Current Trade or Business

This prong requires two inquiries: (1) whether the taxpayer is engaged in a trade or business at the time the expenses are incurred, and (2) whether the education maintains or improves the skills required in that trade or business.

The first inquiry under this prong asks whether the taxpayer is engaged in a trade or business at the time the expenses are incurred. As noted earlier in Groetzinger, a trade or business means an activity engaged in for income or profit with continuity and regularity. Courts sometimes allow short transition periods so long as the taxpayer continues the prior line of work and intends to remain in it. In Zuo v. Commissioner, T.C. Bench Op. (July 26, 2021), the Tax Court recognized that the taxpayer had moved between jobs but concluded he was still carrying on a trade or business because he actively pursued entrepreneurship while entering his MBA program. By contrast, in Hart v. Commissioner, T.C. Memo. 2013-289, the Court denied a deduction for MBA tuition. Hart had graduated only two years before beginning his MBA, held a short-term position in pharmaceutical sales, and then experienced a period of unemployment. The Court found his work history too irregular and concluded he could not show continuous engagement in a trade or business. Without proof of being continuously and regularly engaged, the claim could not succeed.*

The second inquiry under this prong is whether the education maintains or improves the skills required in the taxpayer’s current trade or business. Courts have emphasized that where the coursework builds directly on existing skills, the deduction is stronger. The education must be closely related to the taxpayer’s existing trade or business rather than providing general personal development. Reinforcing this point, the Tax Court in Zuo found that the MBA coursework improved and maintained skills related to his established trade or business as an entrepreneur, which made the education expense deduction allowable.

Prong Two: Avoiding Qualification for a New Trade or Business

The second prong asks whether the education qualifies the taxpayer for a new trade or business. Where the courts find that the education qualifies you for a new trade or business, the education expense deduction is not allowed. This prong is far more fact-specific, and courts interpret it based on the particular facts and circumstances of each taxpayer. The following sections illustrate how courts apply this test when allowing or denying deductions.

When Courts Allowed the Education Expense Deduction

When courts find that the education sharpened existing skills without opening the door to new roles or credentials, they have allowed education expenses as business deductions.

In Allemeier v. Commissioner, T.C. Memo. 2005-207, a sales and marketing manager successfully deducted his MBA tuition because the coursework enhanced the managerial and sales skills he already used before and after the program. The Court emphasized that this did not open new doors to a different career path and therefore did not qualify him for a new trade or business.

In Tao Long v. Commissioner, T.C. Memo. 2016-100, a financial professional with CFA and CAIA credentials was able to deduct his Wharton MBA expenses because the coursework further developed skills he was already using, and the Court found that it did not provide him with entry into a new profession.

The principle extends beyond MBAs. In Coughlin v. Commissioner, 203 F.2d 307 (2d Cir. 1953), the Second Circuit allowed a tax attorney to deduct the cost of attending NYU’s Institute on Federal Taxation. The Court explained that the program was directly related to his existing law practice and served to keep him abreast of current tax developments, without qualifying him for a different role.

Takeaway: Courts allow deductions when the coursework clearly ties back to and enhances the skills already central to the taxpayer’s existing trade or business, and when it does not create qualifications for a new trade or business.

When Courts Denied the Deduction

When courts conclude that the education prepared the taxpayer for new credentials, responsibilities, or an entirely new line of work, they have denied education expense deductions.

In Enrique v. Commissioner, T.C. Summ. Op. 2018-74, a lawyer educated abroad pursued an LL.M. in New York. The Court acknowledged that the program improved his skills but emphasized that it also qualified him to sit for the New York bar, a new professional credential. That shift meant the expenses were not deductible.

A similar outcome appeared in Santos v. Commissioner, T.C. Memo. 2016-100, where an accountant pursued a J.D. The Court concluded that a law degree qualifies the candidate for a new trade or business, the practice of law, even if the taxpayer intended to keep using accounting skills.

In Uchizono v. Commissioner, T.C. Summ. Op. 2023-21, a translation coordinator’s MBA led to a new role in consumer insights and data analytics. The Court observed that without the MBA degree the petitioner would not have been otherwise qualified for the position, making the expenses nondeductible.

Finally, in Czarnecki v. United States, No. 15-1381T, 2017 WL 6519419 (Fed. Cl. Dec. 20, 2017), the Court of Federal Claims rejected a Ph.D. student’s deduction claim. The Court found that the doctoral program qualified him to become a university professor, which amounted to a new trade or business. As a result, the expenses were not deductible.

Takeaway: Courts deny deductions when the education equips the taxpayer for substantially different tasks, credentials, or a career pivot that qualifies as a new trade or business.

The Court’s Method: Evidence and Continuity

Across these opinions, the question is always: what changed after the degree? Courts give weight to evidence that the taxpayer remained in the same general field, using the same core skills. Conversely, if the degree confers licensure or eligibility for tasks outside of prior work, the expenses are treated as nondeductible expenses. The Tax Court has summarized this as an objective test: when the degree qualifies the taxpayer to perform significantly different tasks and activities, the expenses are nondeductible. See Diaz v. Commissioner, 70 T.C. 1067, 1074 (1978).

Brief Note on W-2 Employees, the TCJA, and the OBBBA

Before the Tax Cuts and Jobs Act (TCJA), W-2 employees could deduct job-related education expenses as miscellaneous itemized deductions (subject to the 2 percent adjusted gross income floor). The TCJA suspended these deductions for 2018 through 2025. The recent One Big Beautiful Bill Act (OBBBA) extended this suspension further, so these deductions remain unavailable unless Congress takes future action. Today, W-2 employees cannot deduct such costs. However, they may still be eligible for education credits such as the Lifetime Learning Credit or the American Opportunity Tax Credit.

Practical Guidance: Positioning the Claim

For taxpayers and their advisors, the lessons are clear:

• Document that you are carrying on a trade or business during study.

• Tie specific coursework to existing responsibilities to show skill maintenance.

• Avoid narratives that frame the degree as a pivot to a new field or licensure path.

• Recognize that advanced professional degrees like J.D.s, LL.M.s, and Ph.D.s are especially vulnerable under the “new trade or business” rule.

Conclusion

Ultimately, whether education expenses are deductible as business expenses is highly fact-specific. The same degree program may be deductible for one taxpayer but nondeductible for another, depending on their trade or business and how the education affects their qualifications.

At Vital Tax & Advisory Group, we guide taxpayers through these nuances, analyzing their unique circumstances and advising on whether education costs may qualify under the Internal Revenue Code and Treasury Regulations. If you are considering additional education or have questions about past expenses, reach out to us. The right strategy can turn necessary learning into meaningful tax savings.

*At least one of the cases cited in this article is non-precedential and at least one was not published. They are included here for illustrative purposes and are cited solely as persuasive authority.