Versus MBA: Can CPAs Deduct the Costs?
Patricia H. Mounce and Pamela A. Spikes
MARCH 2006 - In
applying for upper-management positions in public practice
and industry, CPAs often find themselves competing with younger,
better-educated candidates. The AICPA’s 150-hour requirement
has played a major role in this trend.
AICPA revised its bylaws in 1988 to require 150 hours of
college credit prior to sitting for the CPA exam. By 2004,
41 states had implemented laws to meet this standard; five
states had passed but not yet implemented revised laws;
and only four states had either passed and rescinded or
not passed laws at all to comply with the AICPA requirements.
CPAs who graduated before the 150-hour requirement viewed
passing the CPA exam as more important than pursuing a fifth
year of college education. Today, many of those CPAs, who
have gained expertise through work, continuing professional
education, and on-the-job training, find that they want
and need to upgrade their formal education. Many CPAs choose
one of two routes: the Master of Business Administration
degree (MBA), or the Master of Accountancy degree (MAcc).
would contend that the AICPA has promoted the MBA for CPAs.
In 1989, the AICPA vice president for education, Rick Elam,
stated that the Institute did not advocate more accounting
education. In the 150 hours of required education, he suggested
that one-third should be business oriented (“Meeting
the New 150-Hour Standard: What CPAs Should Know About the
New Requirement,” by Stephen J. Collins, Journal
of Accountancy, August 1989). In 1995, Elam suggested
that college students headed for careers as accountants
should have management and communication skills [“Serving
Up an MBA with an Accounting Degree,” by Paul Demery,
The Practical Accountant, 28(7): 12, 1995].
to Terrence L. Johnson, more than 90,000 MBA degrees were
awarded in 1995, compared to 35,000 in 1974 (“Gaining
the Executive Edge,” Black Enterprise, May
1997). According to Jane J. Kim (“M.B.A. Students
May Lose Tax Break,” The Wall Street Journal,
August 17, 2004), that number has continued to rise, with
more than 120,000 MBA degrees conferred in 2002. CPAs may
find the MBA attractive because it is readily obtainable
in nontraditional modes such as evening, weekend, or online
formats and because it offers expertise in areas beyond
accounting. CPAs may find the MAcc degree attractive because
of the specialization it offers and because it may be viewed
as adding more value in an accounting-specific job. In addition,
the MAcc may be regarded as more prestigious because of
the ubiquity of MBAs. In 1980, the Master of Accounting
credential was somewhat unfamiliar to many corporate accountants,
and was accepted to a significantly lesser extent than other
credentials such as the CPA and MBA [“A Survey of
Corporate Controller Attitudes Toward Professional Certification
and Master’s Degree Programs,” by John J. Anderson
and James M. Krueger, Akron Business and Economic Review
11(2): 48, 1980]. While the number of master’s degrees
in accounting is small compared to MBA degrees, the number
has increased significantly, from 3,145 in 1991 to 5,422
in 2002 [“Factors Affecting the Supply of Accounting
Graduates,” by Mary Jo Billiot, Sid Glandon, and Randy
McFerrin, Issues in Accounting Education, 19(4):
443, 2004]. Although many corporations are willing to underwrite
the costs of their CPA employees’ obtaining graduate
degrees, with executive development budgets tightening,
many companies will pick up only a portion of the cost of
postgraduate studies, and some require long-term employment
commitments that include an agreement to repay the education
costs if the commitment is broken.
Incentives for Education Costs
has given taxpayers several incentives that encourage higher
education. The IRC contains various provisions for exclusions,
deductions, or credits that are available to those pursuing
an MBA or MAcc degree:
IRC section 127 allows up to $5,250 of qualified employer-paid
educational costs for undergraduate or graduate tuition,
fees, books, and supplies to be excluded from the employee’s
Under IRC section 25A, taxpayers may be eligible for the
lifetime learning credit for 20% of qualifying expenses
of up to $10,000 per year.
IRC section 222 allows a $4,000 above-the-line deduction
for qualified tuition and related expenses.
states have some type of college tuition prepayment program.
Congress has created an income exclusion for the earnings
used for qualified education costs under IRC section 529.
The interest on Series EE U.S. government savings bonds
(Coverdell education savings accounts) may be excluded
from income under IRC section 135 if the proceeds are
used to pay qualified higher-education expenses.
IRC section 530 allows for a nondeductible contribution
of $2,000 to an education IRA where investment income
is excluded from taxable income and distributions to pay
qualified higher-education costs are generally made tax-free.
section 162 allows an employee to deduct expenses incurred
for education as an ordinary and necessary business expense
under certain conditions.
most of these incentives have restrictions:
As income levels rise, several credits and deductions
are phased out, making them unavailable to many CPAs.
Taxpayers cannot “double-dip.” An expenditure
deducted or credited under one provision cannot also be
taken as a credit or deduction under another provision.
The provisions created by the Economic Growth and Tax
Relief Reconciliation Act of 2001 expire in 2010.
Specific criteria must be met for some provisions. For
example, the IRC section 222 deduction is not available
for taxpayers who choose the IRC section 25 credit for
the tax year.
Some provisions are not available to taxpayers who are
married filing separately.
Section 162 Provisions
the past, IRC section 162 has been a popular way for CPAs
to defray at least a portion of the costs of their graduate
education. This provision permits employees to deduct expenses
incurred for education as an ordinary and necessary business
expense if the expenses are incurred for either maintaining
or improving existing skills in their present job, meeting
the express requirements of an employer or meeting legal
requirements necessary to retain their employment status.
CPAs who take a deduction for expenses incurred in the pursuit
of an MBA or MAcc degree do so with the intent of meeting
the first criterion of improving existing skills in their
present job. Treasury Regulations section 1.162-5 provides
some clarification on the nondeductiblity of certain education
costs. Although the education may maintain or improve skills
required by an employer, education expenses under these
two categories are specifically excluded as a deduction
those expenditures are incurred for meeting the minimum
educational standards for an existing job; or
expenditures qualify the taxpayer for a new trade or business.
fact that a taxpayer is already performing service in an
employment status does not establish that he has met the
minimum educational requirement.
of deducting education expenditures under IRC section 162
is that they are classified as miscellaneous itemized deductions,
and as such are deductible only to the extent that they
exceed 2% of adjusted gross income, and are subject to a
phase-out for higher-income taxpayers. Given these limitations,
section 162 has been a very popular method for taxpayers
to write off their education expenditures for several reasons:
Although the deduction is subject to the 2% floor, it
is not limited to a particular dollar amount.
expenses deducted under section 162 are considered to
be ordinary, necessary business expenses, and include
not only books and tuition but also transportation and
A taxpayer can deduct any excess qualifying costs ineligible
for a deduction or credit under another provision of the
n Even with the 2% limitation, this option may be more
the $4,000 above-the-line deduction or the IRC section
25A credit because the phase-out for these incentives
begins at a lower income level.
stated, a CPA might rationalize the deductibility of the
costs associated with pursuing either an MBA degree or a
MAcc because either would presumably improve her skills.
A CPA already in public practice or industry might argue
that a MAcc is not a minimum educational standard for most
accounting jobs and many business-related jobs, and would
probably not qualify the CPA for a new trade or business.
A CPA could also argue that an MBA is not a minimum educational
standard, because many older senior executives do not hold
an MBA degree (“A Little Learning Is a Dangerous Thing
to Deduct,” by Albert B. Crenshaw, The Washington
Post, July 22, 2004). Whether
obtaining an MBA qualifies a CPA for a new profession is
not so easily determined. As discussed below, the deductibility
under IRC section 162 of the education costs of obtaining
an MBA has been challenged by the IRS and upheld by the
U.S. Tax Court on the basis that the MBA qualifies the taxpayer
for a new trade or business.
decisions indicate that the IRS’s position is that
taxpayers already working in a business field will no longer
be able to deduct the cost of obtaining an MBA under IRC
section 162. Robert Willens, a tax and accounting expert
at Lehman Brothers Holdings, Inc., speculates that those
claiming the MBA deduction may be more susceptible to IRS
audits, and suggests that it is becoming virtually impossible
to take a deduction for education expenses (Kim, August
IRS Decisions and Court Rulings
recent IRS letter rulings and Tax Court decisions give the
impression that the education costs of obtaining an MBA
will not qualify as an IRC section 162 deduction. The IRS
has challenged the deduction and the Tax Court has affirmed
the disallowance where employees worked in a business setting,
maintained management positions, and sought to improve their
existing skills. In a 1986 letter ruling (Letter Ruling
8714064) and again in a Tax Court summary decision (TC Summary
Opinion 2002-49), taxpayers were denied a deduction under
IRC section 162 for educational costs to obtain an MBA degree.
In both situations, the taxpayers left their jobs in business
to pursue the MBA. The IRS agreed in both cases that the
taxpayers’ skills were maintained or improved by their
course of study. However, the taxpayers were not required
by their employers to obtain an MBA, and although the taxpayers
did not intend to enter into a new career, the MBA qualified
them to do so. Treasury Regulations section 1.162-5 specifically
denies a deduction for educational costs that qualify the
taxpayer for a new trade or business. Therefore the expenses
were not “business expenses” as defined in section
2003, the Tax Court upheld the IRS’s decision to deny
the deduction for an attorney’s education expenses
in pursuit of an MBA degree (TC Memo 2003-68). The taxpayer,
who held an LLM in corporate finance, was advised to obtain
a JD degree to increase his marketability in a competitive
environment. Subsequently, he chose to extend his studies
by one year in order to obtain joint JD/MBA degrees. Although
the attorney had worked as a summer associate for law firms
while he was a member of the state bar, the IRS contended
that his assignments and compensation were similar to other
full-time nonattorney associates and thus he had not established
himself in his trade or business as a practicing attorney.
The court reasoned that it was necessary to break the education
cycle and engage in a trade or business before deducting
2004, the IRS again denied a deduction for education expenses
in the pursuit of an MBA degree by a financial analyst working
in the investment banking industry (TC Summary Opinion 2004-107).
In 1996, a financial analyst with a BA degree quit her job
in the investment banking industry because of the long hours
she had to work, and pursued an MBA full-time. To be promoted
from “financial analyst” to “associate”
in 1996, the investment banking industry required an MBA
degree. Upon completion of her MBA the taxpayer took a position
in the manufacturing industry in a “general management
program” that required an MBA or equivalent. She argued
that the expenditures were incurred to maintain and improve
her skills and that the expenditures were required as a
condition to the retention of an existing employment relationship.
She focused on the similarities between her duties as a
financial analyst and those of the associates at the investment
banks firms where she had worked.
in the previous cases, the deduction was denied on the basis
that the MBA qualified the taxpayer for a new trade or business.
Although the duties of analyst and associate overlapped,
the analyst position was a subordinate temporary position
lasting for a maximum of three years. The IRS contended
that the fact the taxpayer was already performing service
in an employment status did not establish that she had met
the minimum educational requirements for qualification in
that employment. In its decision, the court agreed with
the IRS and cited Treasury Regulations section 1.162-5(b)(3),
stating that the expenses were not deductible even though
the taxpayer did not intend to enter a new field of endeavor,
and even though the taxpayer’s duties were not significantly
different after the education from what they had been before
degree can be an important asset to older CPAs competing
with the new generation of CPAs who are entering the workforce
holding MBAs or MAccs. A CPA who wishes to deduct the cost
of a graduate degree under IRC section 162 should consider
several issues. The IRS may challenge a CPA on the cost
of obtaining a MBA or MAcc on the grounds that it prepares
the CPA for a new trade or business. Whereas the MBA appears
to be nondeductible, will the IRS and courts recognize the
MAcc as simply an improvement of skills for the CPA? If
a CPA quits a job and returns to school full-time, will
the IRS and courts view this as a temporary suspension of
employment, or as preparation for a new career?
a graduate degree is costly, and taxpayers should take advantage
of any legal means to minimize that cost. Most taxpayers
would agree with Judge Learned Hand’s observation
in his 1947 court ruling (Comm’r v. Newman):
and over again courts have said that there is nothing
sinister in so arranging one’s affairs as to keep
taxes as low as possible. Everybody does so, rich or poor;
and all do right, for nobody owes any public duty to pay
more than the law demands: taxes are enforced extractions,
not voluntary contributions.
on recent IRS rulings and court decisions, however, taxpayers
may have lost the power to obtain an IRC section 162 tax
deduction for the cost of obtaining an MBA degree. It appears
that it will be very difficult to get the deduction, and
MBA students who claim the deduction should be prepared
for an IRS audit. Will CPAs see the MBA degree as a benefit
to their professional career that surpasses the additional
costs resulting from their inability to deduct their expenses?
Or will they determine that the MAcc provides a comparable
benefit, and one that satisfies the IRC section 162 regulations?
H. Mounce, PhD, CPA, is an associate professor of
accounting, and Pamela A. Spikes, PhD, CPA,
is a professor of accounting, both at the University of Central
Arkansas, Conway, Ark.