Business expenses are costs that take place in the ordinary course of business. For expenses to be deductible, they must be “Ordinary and Necessary” for your trade or business. Education expenses are no different, but they do come with additional requirements. What education expenses are tax deductible? Well, the requirements revolve around whether your education expenses are for improving your skills, compliance with applicable laws, and whether the education is related to your business.
If you’re a freelancer, sole-proprietor, or otherwise self-employed, a business expense tracker app can help you record your tax deductible education expenses. Whether it’s keeping up with the latest industry news, or learning a relevant skill for a new project, you may be able to deduct these expenses from your taxes.
However, navigating the IRS rules for which educational expenses count as tax deductions can be tricky. Let’s discuss.
According to the IRS, in order for your education expenses to count as a write-off, it might be to “maintain or improve your job skills.” In essence, that boils down to a couple of requirements:
Over time, there are updates to the tools, software, and process by which you provide your freelance services. To stay competitive in your field, you need to maintain your level of skill and improve on what you already offer. This can include paid training such as classes and self-study programs. For example, if you paid for a class that walked through massive updates to software you use to provide design services, this could be considered maintaining your skills. If the class is for another program you want to start using for your design work, it could be considered improving your skills by expanding what your business can offer. In either case, the IRS will recognize this as a deductible business expense.
Some professions are required by law to complete continuing education requirements. You must follow these requirements to continue to provide the services in that field. For example, a Real Estate Agent in California needs to complete multiple hours of continuing education between license renewal periods. Not meeting this requirement may mean you won’t be able to operate as a Real Estate Agent. Since this is required by law, the IRS will allow it as a deduction. Other professions that require continuing education to maintain their status are CPAs and Enrolled Agents.
If you passed one of the two requirements listed above, you’re almost in the clear. The next requirement seems straightforward; the education must be related to your current trade or business and not qualify you for a new trade or business. For example, you can’t write off a writing class if you’re a delivery driver. You can only deduct the education within the field you currently work. Also, let's say a freelance web developer wants to take a sales class so they can better sell their services. Even though this would improve their skills in “selling” their service and they have no intention of becoming a salesperson, the IRS may disallow this deduction. Why? Because their new sales skills could qualify them for a new business, regardless of their intention in taking the class.
The IRS doesn’t allow a deduction for education expenses that help you meet the “minimum requirements” to offer your services. However, the IRS does not specify what the “minimum requirements” of each trade or business are. Therefore the “ordinary and necessary” concept should be applied. For example, if you start a web developer business, a class on basic web design would likely not be deductible because web design knowledge would be considered a “minimum requirement” to operate your web design business. When determining if the education would qualify as a “minimum requirement” to do business, ask yourself what the minimum requirements are to run your business. In the above example, you would ask if it is an industry standard for freelance web developers to learn programming while offering web programming services. Although there may be some freelancers that are learning as they go, the IRS would not recognize this as ordinary and as such, the education expenses would not be deductible.
In a situation when you can’t deduct your education expenses as a business deduction, there are other non-business deductions you may be able to claim on your tax return: the Lifetime Learning Credit and the Tuition and Fees Deduction (as of this writing, the deduction is only available through 2020). Aside from other requirements, your income (if filing single) cannot exceed $68,000 for the Lifetime Learning Credit and $80,000 for the Tuition and Fees Deduction. The maximum deduction for the lifetime learning credit is a $2,000 nonrefundable credit and $4,000 for the tuition and fees deduction.
Here we will go over some examples for which education expenses are tax deductible.
Let’s say you’re a freelance designer who typically works with small business clients to prepare their branding and marketing assets. You start learning web development on Coursera, in order to add website creation to your services. That’s considered work-related education!
Now that we know when education expenses qualify, we can go over what qualifies. Tuition, books, supplies, and other related costs are qualifying expenses. You can also include the mileage to attend classes as a business deduction. Document your expenses as well as the purpose of your education costs. The taxpayer has the burden of proof, so always be ready to substantiate your expenses while following IRS rules.
Books, podcasts, and videos are a common way to stay up-to-date on your industry and best practices. If you also use your subscription for personal reading, then simply apply a percentage tax deduction.
If you’re in an industry that requires a license or a certification periodically renewed, then all fees related to the preparation for those renewals are tax-deductible. Just remember -- you have to work in that field currently. Costs associated with getting your real estate license initially can’t be written off. Here is a list of more write-offs for real estate agents.
A news subscription can be an effective way to stay up-to-date with policy and industry at large. If it helps you with client small-talk and ensures that you sound professional at meetings and conferences, it’s a write-off!
If you are working toward a part-time degree while freelancing, then you may be able to claim your tuition and other associated fees as continuing education expenses. For example, if you’re a freelance consultant getting an MBA on the side. Just remember -- you have to already be working as a freelancer in a related field in order to claim this benefit. Here is our guide to carrying losses forward for educational expenses.
If you do a lot of public speaking or even client development discussions, then an improv class can really help you loosen up and feel more comfortable in your freelancing.
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