Training and Business Deductions
Almost any successful person will tell you the importance of continued education to success. In the book “The Millionaire Next Door,” the author, Thomas Stanley interviewed numerous self-made millionaires to discover their habits. One consistently recurring theme is that these millionaires place a high value on education and will not take short cuts when it comes to the advantages provided to successful entrepreneurs by quality education, regardless of the cost. In this article, we will begin from the premise that part of the process of forming a new business to be successful is research, education, and training, and that these processes can be a costly part of beginning a new business.
All business starters and owners want to take advantage of tax deductions in creating or growing their business. Since education and training costs are a predictable part of these start-up costs, what does the tax code provide in terms of the ability to deduct these substantial costs?
There are two categories of business deductions that come to mind. One is continuing education and the other is business start-up and organizational costs. Let us examine both categories.
Continuing Education Deductions
As the name implies, continuing education refers to a deduction for obtaining additional training in a skillset that you already have. As a licensed Real Estate agent, I am required to obtain additional training every time I renew my license, and many other professions have similar requirements. I can readily deduct the costs of that education as long as I am active and earning money as a real estate agent, and the education fits within the scope of the practice of being a real estate agent.
But when I became a Real Estate agent, the IRS would not allow me to deduct the cost of training to pass the real estate license exam. Obtaining a new skillset to start a new business is not “continuing” education.
It is critical to be aware of this distinction if you are starting something new, and for which you have not previously been paid. An important example is that of a licensed and practicing medical doctor, whose practice was as a General Practitioner. He decided that it would be helpful if he studied more on blood diseases to be of greater assistance to his patients. When he claimed this as continuing education, the IRS disagreed, he went to court, and the IRS prevailed, on the argument that this education qualified him to become a Hepatic Specialist, which is a different profession than a General Practitioner. That Education was not allowed as qualified for a continuing education deduction.
Do not try to stretch the rules on this point, the IRS will carefully evaluate any large educational claim before allowing it as continuing education.
Business Start-Up and Organization Costs
This category of tax deductions is more likely to be a legitimate deduction for new businesses. The IRS understands that there are marketing and advertising expenses, employee training and professional fees associated with establishing your business structure and organization. I am going to advise right here, that you need to work with your accountant regarding any personal application of this information, there are formulas that you must follow to calculate the deductible amount. And since the IRS considers these as capital costs, they would fall in the category of long-term assets as you are investing in the future of your business, so any additional costs beyond your calculated allowable deduction in year one of the business may be deductible over future tax years.
Since these are business start-up and organizational costs, to deduct them, there must be a new entity formed as well. You cannot deduct “something” against “nothing.” By the same logic, there must be offsetting income from the business during the same year.
Some of the categories of expenses that fall into the start-up costs area would be research, hiring and training for employees (you would be an employee of your business), legal expenses, rent, utilities, travel, license and permits, interest and borrowing costs, equipment and supplies, promotion, advertising, and insurance. You can not include capital expenses for buildings and vehicles, these would fall into separate categories.
We want to encourage people to make education and training a part of your life process, especially in starting and growing a business. The IRS wants to encourage that as well, and if you will follow their rules, they will allow your deductions. We wish you much success with your business.