Tax tips: Can you deduct educational expenses for your employees?
As a practice owner, you want to nurture your employees to be the best that they can be—for their own sake and the sake of your practice. So if you have a veterinary assistant who wants to become a certified or licensed technician, is the cost of gaining these credentials tax-deductible to you if you pay the tuition?
Practice owners can pay tuition costs under an educational program defined under IRS code section 127. To do this, you must provide the IRS with a separate written document that doesn't address any other types of employee benefits, and you must list all requirements of the program. The plan must be nondiscriminatory—it must apply to all technicians. Amounts excludable from each employee's income are limited to $5,250 per year. If the plan is not written or is discriminatory, the tuition paid on behalf of the employee would have to be considered additional W-2 earnings and taxed as a fringe benefit.
If you don't want to establish a program under the IRS code, you have another option. You can exclude education reimbursements from an employee's income as a working condition fringe benefit. To do this, your employee must choose job-related education that maintains or improves his or her current job skills. The education must also meet your express requirements as an employer or the requirements of applicable law or regulations. Continuing education at veterinary conferences fits this definition.Here's what the IRS is looking for: Does the education qualify the team member for a new trade or business? Since the cost of education is leading to a license, the IRS has decided that it does. Therefore, the cost of education is not tax-deductible. The IRS has ruled, for example, that a CPA exam review course is nondeductible because a CPA is considered a new trade or business. Here are some other examples from specific legal cases:
> A senior engineer technician was not allowed to deduct costs for courses that led to an engineering degree. After getting the degree, the person was promoted to assistant engineer and the degree qualified him to take the certified professional engineer exam.
> A landscape architect was not allowed to deduct costs for courses that qualified him to take the exam to become a registered landscape architect. This was considered a separate trade or business since only a registered landscape architect can use the title of landscape architect and affix an official seal to plans or designs.
The IRS ruling considers the difference in tasks a licensed person is able to perform compared to someone who isn't licensed. There have been no IRS rulings specifically related to the costs of certification and licensing of veterinary technicians, but based on rulings for other professions, it would appear that paying for a veterinary technician's licensing education qualifies him or her for a new trade or business. Thus, if you don't pay for the educational costs under the educational assistance program, you must report the payment as income on the employee's W-2. The employee would not be able to deduct the cost. Keep these things in mind, but talk to your tax advisor before reaching a final decision.
Veterinary Economics Editorial Advisory Board member Gary Glassman is a partner with accounting firm Burzenski and Co. in East Haven, Conn.