The Tax Cuts and Jobs Act, TCJA, passed in 2017 suspended the income tax deductions for work-related educational expenses for employees through 2025. There is no guarantee that after 2025 the IRS will reinstate employee deductions for educational expenses.
Fortunately, the TCJA retains the allowable education costs as deductible business expenses for sole proprietorships and self-employed taxpayers.
Let's look at which work-related educational expenses are deductible and how they should be reported on a self-employed person's Form 1040.
Requirements to Deduct Expenses
Must involve your current work – The IRS allows deductions for educational expenses that maintain or improve your skills in your current work. For example, a dental hygienist may take courses to learn new medical techniques or how to operate more sophisticated equipment. Or security personnel may attend classes for up-to-date information on new security regulations or training in new techniques on dealing with confrontational situations.
Education that enables an individual to provide services for another aspect of the trade is deductible as improving a skill rather than entering a new trade or profession.
Certain educational expenses can be deducted even if they lead to a degree, as long as the degree does not qualify the student for a new trade or business and is not necessary to meet the minimum requirements of the student’s current job.
Must be mandated by law or regulations – Some state and local governments require certain professions to take a minimum number of continuing education courses to maintain their licenses or certifications. Some states require professional counselors, for instance, to take 30+ hours of continuing education to renew their licenses every two years.
Expenses That are Not Deductible
Don’t pertain to your current business – Deductible educational expenses must be related to your current business or trade. You cannot deduct educational expenses that would qualify you for a new trade or business.
Suppose you’re already certified as a teacher and have an active tutoring business and work as a substitute teacher, but decide you want to diversify your income by becoming a real estate agent. You could not deduct the expenses for educational classes to learn how to become a real estate agent because the IRS would consider that a new trade or business.
Expenses needed to qualify for a business – The IRS will not allow deductions for educational expenses that are needed to meet the “minimum requirements” for a job. Take a plumbing contractor as an example. If the state requires passing an exam to obtain a plumbing license, the cost of taking plumbing education courses to learn the trade and pass an exam would not be deductible. These would be considered as costs required to meet the minimum requirements to enter a trade or profession.
Direct Expenses That Can be Deducted
Education expenses the IRS allows to deduct are:
- Tuition, books, lab fees, laptop computers and supplies
- Certain travel and transportation costs
- Research costs and typing
How to Deduct Educational Expenses
A self-employed taxpayer or a sole proprietor would deduct educational expenses using Schedule C, Profit or Loss From Business, and file with Form 1040.
Schedule C does not have a specific category to use for educational expenses. Therefore, you would itemize all of your qualifying educational expenses in Part V and enter the total on Line 27a labeled “Other expenses.”
Not only do deductions for educational expenses reduce taxable income for self-employed individuals, but these deductions also reduce the amount of self-employment taxes.
As with the need for all self-employed individuals to keep proper records and documents to support business-related expenses, a taxpayer needs to keep all bills, receipts and invoices for work-related educational expenses to be able to prove each expense in the case of an audit.
James Woodruff has been a management consultant to more than 1,000 small businesses. As a senior management consultant and owner, he used his technical expertise to conduct an analysis of a company's operational, financial and business management issues. James has been writing business and finance related topics for work.chron, bizfluent.com, smallbusiness.chron.com and e-commerce websites since 2007. He graduated from Georgia Tech with a Bachelor of Mechanical Engineering and received an MBA from Columbia University.