Good News for M.B.A. Students: Tuition Is Now More Deductible

A specialized court’s decision should embolden more students enrolled in M.B.A. programs across the country to deduct their tuition—especially if they are getting an executive M.B.A.

In the case, Kopaigora v. Commissioner, the Internal Revenue Service had hoped to collect thousands of dollars from Alex Kopaigora, a 42-year-old who came to the U.S. from Ukraine in 1994 on a Mormon mission and later became a citizen. In 2011, he was employed at a hotel in Los Angeles and commuted to Brigham Young University in Salt Lake City, for its executive M.B.A. program.

Mr. Kopaigora and his wife, Elizabeth, deducted $18,879 for tuition, commuting and other expenses on their 2011 tax return that the IRS disallowed, in part because he was unemployed for several months of the year.

But the judge disagreed with the IRS, saving the Kopaigoras $2,111 in taxes—and providing more ammunition to M.B.A. students who want to deduct education expenses in the future.

“This case is a big win for all M.B.A. students,” says Robert Willens, a tax expert who teaches at Columbia University’s business school and has advised hundreds of M.B.A. students on the ins and outs of deducting tuition.

The decision was released earlier this month by the Tax Court, a specialized tribunal. Although the case is of a type that can’t be appealed or formally cited as precedent, experts say such cases often are influential both inside and outside the IRS.

According to the Department of Education’s most recent data, about 110,000 students were pursuing graduate degrees in business in 2014. About 12,000 students were enrolled in executive M.B.A. programs in the U.S. in 2015, according to the Executive MBA Council, and three-quarters of them paid all or part of their own expenses.

To see why the case has broad implications, it is necessary to grapple with intricacies in the tax law. The rules allow deductions for education costs as “unreimbursed business expenses” on Schedule A (for employees) and on Schedule C (for the self-employed)—but not if the courses prepare the student for a new type of business or license, such as for law or nursing.

In practice, this requirement often precludes taxpayers from taking deductions for both undergraduate and graduate education expenses, although other tax benefits may help with these costs.

Many M.B.A. students qualify for a deduction, however, because they have worked before enrolling in a program and are seeking to “maintain or improve” their skills, as the law requires. In addition, the degree doesn’t lead to a license.

Still, the IRS often challengesM.B.A. deductions, experts say. Although the agency has lost court cases in this area, it has succeeded in asserting fine distinctions.

For example, if an M.B.A. student switches fields after graduation, it is harder to justify a write-off. So an M.B.A. candidate who previously worked in finance and returns to it will have a stronger case for a deduction than one who switches to consulting after graduation.

The Kopaigora decision helps M.B.A. students in two ways, Mr. Willens says. It is the first to justify deductions for an executive M.B.A. program. In addition, the judge allowed the deductions as “unreimbursed business expenses,” even though Mr. Kopaigora was unemployed for part of the year he was pursuing the degree.

This is good for taxpayers who are unemployed because they are M.B.A. students. “Now it’s harder for the IRS to say that being in a full-time program bars the deduction,” says Mr. Willens.

Unlike many other taxpayers in Tax Court, Mr. Kopaigora didn’t argue his own case. He was represented by Barbara Lock, a lawyer with the low-income taxpayer clinic based at the University of Idaho’s law school. It is one of 130 clinics authorized by Congress, overseen by the Taxpayer Advocate Service, and—ironically—funded in part by IRS grants.

Taxpayers are eligible for help if they have income less than 250% of the poverty level—about $30,000 for single taxpayers and $60,000 for a family of four.

Mr. Kopaigora, who is a small-business consultant in Salt Lake City now, says he is grateful for expert representation he couldn’t afford at the time.

“I knew the deductions were legitimate,” he says, “but the IRS just disallowed them. Most people give up and write a check, but I had a little more grit, having grown up with the Soviets.”