Issue 7 - May 2004

Finance & Taxes By Mark E. Battersby
How getting ‘smarter’ pays off

It pays to get smarter — at least as far as the IRS is concerned. According to tax rules, many of the educational and training expenses incurred by your practice are both tax deductions for the practice and, at the same time, tax-free to the recipients.

That’s right — a largely-ignored provision of our tax law permits your practice to claim a tax deduction for expenditures made to educate or train employees. This ideal “fringe” benefit allows the recipients of this training or educational expense reimbursement to often ignore the amounts paid by the employer when computing their own income tax bills.

BASIC EDUCATIONAL DEDUCTIONS
Our lawmakers created three types of personal tax deductions for educational expenses:

1. Deductible interest. Interest paid during the tax year on any qualified education loan is deductible as an adjustment to gross income on Form 1040. Of course, the debt must have been incurred by the taxpayer solely to pay qualified higher education expenses.

2. A so-called ‘above-the-line’ limited tax deduction. This is for tuition and related expenses paid for enrollment or attendance by the taxpayer or the taxpayer’s spouse or dependent at any accredited post-secondary institution.

3. Business deductions. Finally, education expenses may be deducted as a business expense on your personal income tax return, even if they lead to a degree.

The business expense deduction for employees — even employees of their own practice — does not apply to educational expenses that are personal.

Un-reimbursed expenditures for such items as tuition, books, laboratory fees, dues paid to professional societies and fees paid for professional journals are usually treated as itemized deductions by employees, subject to the two-percent floor. The cost of technical books of relatively permanent value used in connection with professional work is a capital expenditure and must be depreciated.

When it comes to travel, generally you cannot deduct travel — such as a trip to France to familiarize yourself with the language — as a form of education. However, you can deduct travel expenses incurred in pursuit of an education, if the education expense itself is deductible as a business expense or as a higher education expense.

For example, if you travel to Paris to take classes on a new procedure offered only in France, a deduction may result.

TAX CREDITS
Lawmakers created two education-related credits: the Hope Scholarship credit and the lifetime learning credit. These credits may be claimed for tuition expenses incurred by students pursuing college or graduate degrees or even vocational training. Both credits are available for qualified tuition and related expenses incurred for you, your spouse or your dependent who is an eligible student at a qualified educational institution:

• Hope Scholarship credit. The maximum allowable credit for the Hope Scholarship is $1,500 per student for each of the first two years of post-secondary education. Specifically, the Hope Scholarship credit allows taxpayers a 100 percent credit per eligible student for the first $1,000 of qualified educational tuition expenses and a 50 percent credit for the second $1,000 of qualified tuition paid.

• Lifetime learning credit. This provision allows a credit of 20 percent of qualified tuition expenses paid by the taxpayer for any year the Hope credit is not claimed, up to a maximum allowable credit of $2,000. Both of these credits can be claimed on Form 8863 (Educational Credits).The lifetime learning credit is equal to 20 percent of the amount of tuition paid by the taxpayer and is available for the first $10,000 of tuition ($5,000 for years beginning before 2003).

EMPLOYER-PROVIDED EDUCATION
An equipment supplier can provide customer training that is both tax deductible and which the recipient may legally ignore. Closer to home, an employee’s gross income rarely includes any amounts paid or incurred by the employed for educational assistance — if the assistance is furnished pursuant to a formal program established by the employer. The employer, of course, may deduct those educational expenditures as legitimate business expenses.

To stop business owners from claiming a tax deduction for educational expenses that are tax-free to the recipient, Congress has imposed a limit on the amount that an employee may exclude from his or her income: $5,250 each year.

Under our tax rules, an educational assistance program is defined as a separate, written plan of an employer for the exclusive benefit of the employees, established in order to provide those employees with educational assistance — which includes the payment of tuition, fees and similar payments as well as books, supplies and equipment. Naturally, as with every fringe benefit provided by chiropractic practices, restrictions apply:

• Nondiscriminatory. The educational assistance program cannot discriminate in favor of employees who are highly compensated — such as the principals in that practice. In fact, no more than five percent of the amounts paid or incurred by the employer for educational assistance during the year may be provided for individuals who are five-percent or more shareholders or principals in the chiropractic practice.

• Available to all eligible employees. Although educational assistance programs do not require actual or immediate funding by the practice, reasonable notification of the availability and terms of the program must be provided to all eligible employees.

• No choice of remuneration. And, because the chiropractor is not required to put money into the chiropractic practice’s educational assistance plan each year, the program cannot offer a choice between educational assistance and other remuneration that might be included in an employee’s gross income.

• Other restrictions. The plan cannot cover the cost of equipment, tools or supplies that you as the employer may retain after the employee completes the course. Nor can it cover the cost of meals, lodging or transportation.

Although the courses covered by an educational assistance plan need not be job-related, courses involving sports, games or hobbies may be covered only if they involve the employer’s practice or are required as part of a degree program. The exclusion applies to undergraduate courses beginning before June 1, 2000. It does not apply to any graduate level courses of a kind normally taken by an individual pursuing a program leading to a law, business, medical or other advanced academic or professional degree.

Training and educational expenses, whether paid for by the practice/employer, by an equipment supplier or a distributor, or are subsidized or sponsored by an industry group or association, are usually considered to be fringe benefits, because they are, for the most part, tax-free to the recipient.

You or your employees can enjoy an offsetting tax deduction for those educational expenses that are not covered by the practice. Everybody profits, especially the chiropractic practice that will have smarter, better educated or trained employees as well as tax deductions for educational expenses.

Mark E. Battersby is a tax and financial advisor, freelance writer, lecturer and author with offices in suburban Philadelphia. He can be contacted at 610-789-2480.

Disclaimer: The author is not engaged in rendering tax, legal or accounting advice. Please consult your professional advisor for any issue related to your practice.