Most of us have had that thought: “If I just got another degree, I could be better at my job.” It’s the classic drive to improve, to climb the ladder, and to invest in yourself.
Lori A. Singleton-Clarke, a dedicated and highly experienced nurse from Maryland, had that thought, and it led her straight into a showdown with the IRS in U.S. Tax Court.
A Nurse with a Plan
Ms. Singleton-Clarke was no rookie. She was a registered nurse with a 24-year career, holding positions that ranged from clinical nurse to director of nursing, in charge of 110 nurses.
In 2005, while working as a hospital’s quality improvement coordinator, she decided to enhance her administrative skills by enrolling in an online Master of Business Administration program with a specialization in health care management. She enrolled specifically to “become more effective in her then-present duties.”
She personally paid $14,787 for the courses that year and, when she filed her 2005 tax return, deducted the amount as an unreimbursed employee business expense. The IRS, however, disallowed the entire deduction, leading to the court case.
The Rules of the Game: Education as a Business Expense
This is where we dive into the tax regulations. To be deductible, your education expenses must meet one of two tests:
- The education maintains or improves the skills required in your current job.
- The education meets the express requirements of your employer or the law to keep your present salary, status, or job.
But, even if your education meets one of those tests, it is NOT deductible if:
- It’s needed to meet the minimum educational requirements for your current job, OR
- It qualifies you for a new trade or business.
That last point is the landmine. The IRS argued that an MBA qualified Ms. Singleton-Clarke for a new trade or business, making her expenses non-deductible personal costs.
The Court’s Decision: Enhancing Skills vs. Starting Anew
The case hinged on a simple question: Did the MBA just improve Ms. Singleton-Clarke’s existing skills, or did it prepare her for a brand-new career?
The Tax Court judge sided with Ms. Singleton-Clarke, and the reasoning is a crucial lesson for any professional.
The court found that the “decisive factor generally is whether the taxpayer was already established in their trade or business.” The judge pointed to Ms. Singleton-Clarke’s extensive 24-year career in both clinical and managerial health care settings. She wasn’t a recent graduate or someone changing careers; she was a seasoned professional.
The court contrasted her case with others where MBA expenses were denied because the taxpayers had little to no experience in the business world before enrolling. The judge stated that the facts in favor of Ms. Singleton-Clarke were “even stronger” than in previous cases where taxpayers had won.
The final ruling was that her MBA did not qualify her for a new trade or business. Instead, it improved the “preexisting skill set” she was already using in her management-related nursing role. The degree was a polish on her old career, not a stepping stone to a new one. As a result, she was allowed to deduct the full $14,787.
