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CE, employee training are tax deductible
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Although most optometric professionals are all too familiar with the importance of continuing professional education, many ignore or fail to take advantage of the multiple programs and benefits that have resulted from the government’s increasing emphasis on education. While much of that emphasis was aimed at those entering the workforce or a profession for the first time, our tax laws continue to offer write-offs for improving existing skills or retaining professional status or license.
In addition, despite the turmoil over taxes and the drastic changes envisioned by our lawmakers, tax breaks for last year’s educational expenses remain. Of course, there is a strong possibility that many of those tax benefits, especially those claimed as personal business expenses, may be curtailed or even eliminated as lawmakers continue to tinker with tax reform for 2013 and beyond.
Mark E. Battersby
Employee training
An optometric practice that trains a new worker or an existing worker for new duties incurs what our tax laws consider “ordinary and necessary” tax deductible business expenses. It little matters whether an optometric professional is self-employed, an employee of his or her own practice or strictly an employee, tax deductions and unique write-offs abound for anyone willing to look for them – or seek direction from an expert. In fact, under those tax rules, many educational and training expenses incurred by an optometric practice are both tax deductible by the practice and, at the same time, tax-free to the recipients.
An optometric practice may deduct the cost of ordinary and necessary expenses paid for employee education and training, even amounts paid to others. It may also deduct the cost of education for the practice’s principals if the education or training “maintains or improves skills required in the trade or business” or the education is required by law or regulations for maintaining a license to practice, status or job. Continuing professional education is, for example, generally tax deductible by those in many fields.
Naturally, expenses incurred to meet the minimum requirements of an individual’s present trade or business or those that qualify them for a new trade or business are not deductible. This is true even if the education maintains or improves skills required in the present employment.
Everyone benefits from educated employees
Do not overlook the impact of education on the optometry practice’s employees – one of the major assets of that practice. As is the case with other “assets,” an optometric practice usually has quite a bit of money invested in hiring and training workers.
When it comes to better educated workers, everyone benefits, thanks in large part to our tax laws. The optometric practice prospers with more knowledgeable, better-trained employees as well as a tax deduction for footing the bill for employee education or training. Those educated employees, along with the practice’s principal(s), can reap tax deductions for the education bills they incur.
Educational assistance plan
In general, an employer with an educational assistance plan can deduct up to $5,250 of educational assistance provided to an employee each year. Without an educational assistance plan, or if educational assistance exceeds the $5,250 threshold, the amounts qualify as a tax deduction if they are so-called “working condition” benefits. A working condition benefit is a service or property that, if an employee paid for it, the amount paid would have been deductible as a personal business expense.
An educational assistance program is a separate written plan that provides educational assistance only to the optometric practice’s employees. These expenses usually include the cost of books, equipment, fees, supplies and tuition. The cost of a course or other education involving sports, games or hobbies is usually not allowed unless required as part of a degree program or unless it has a reasonable relationship to the practice.
Although the tax law requires an actual “plan,” the rules do not require an employer to fund the plan’s educational benefits. In fact, most practices with a plan pay the educational benefits out of the practice’s general fund. Naturally, the benefits paid to participants cannot be conditional on their making contributions to the educational assistance plan.
Unfortunately, no educational assistance plan or program is permitted to pay more than 5% of its benefits to principal shareholders or to an employee who received more than $110,000 in pay for the preceding year (unless the employee was not in the top 20% of employees). Plus, the practice or business must provide “reasonable” notice concerning the availability and terms of the plan to all eligible employees.
Educational reimbursement excluded from gross income
With an IRS-approved educational plan, payments for educational expenses, even those for graduate level courses, can be ignored or excluded from the gross income of the employee/recipient. In addition, employees may be able to exclude as “working condition fringe benefits” any amounts that might not have been excludable under the basic plan. Also, all payments made by an optometric practice – or any practice or business with a similar plan – are tax deductible as ordinary and necessary business expenses.
Despite the latitude given businesses and professional practices, there are restrictions placed on educational assistance plans. Educational assistance, to our lawmakers, does not include payments for tools or supplies that an employee gets to keep after completing the course or employee meals, lodging or transportation.
Itemized education deductions
An employee itemizing his or her personal deductions can claim a deduction for the expenses paid for work-related education. The deduction is the amount by which qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2% of the employee’s adjusted gross income. An itemized deduction reduces the amount of income subject to tax.
For the self-employed, expenses for qualifying work-related education – or continuing professional education – are deducted directly from self-employment income. This reduces the amount of income subject to both income tax and self-employment tax. Work-related education expenses may also qualify for additional tax benefits, such as the tuition and fees deduction.
Personal business expense
The cost of qualifying, work-related education can often be deducted as personal business expenses by an employee. This is education that meets at least one of the following two tests:
- education required by an employer or by law in order to keep present salary, status or job. Of course, the required education must serve a bona fide business purpose of the employer
- education that maintains or improves skills needed in the individual’s present work
- However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it:
- is needed to meet the minimum educational requirements in the individual’s present trade or business or
- is part of a program of study that will allow the individual to qualify for a new trade or business.
Any individual can, of course, deduct the costs of qualifying work-related education as a personal business expense, even if the education leads to a degree.
The fact that an individual is already employed does not mean the minimum requirements for qualification in that employment have been met. If new education requirements are established after an individual has met the minimum requirements, that individual will be treated as continuing to meet those qualification requirements. In other words, expenses incurred in meeting the new requirements will be tax deductible.
Keep in mind that a change in duties is not a “new trade or business” if the new duties involve the same general work as that involved in the present employment. Thus, shifting from a receptionist to an optician does not result in a new trade or business.
Education pays, not costs
Training and education are vitally important for every optometric practice to ensure its success and continued profitability. Those training and educational expenses, whether paid for by the optometric practice/employer, a supplier or equipment distributor or subsidized or sponsored by an industry group or professional association, can be considered fringe benefits because they are, for the most part, tax-free to the recipient.
Whether it falls under the heading of continuing professional education or employee training, an optometric practice’s employees/principals, self-employed optometric professionals or practice employees being trained or educated can benefit from the tax deductions that existed in 2012 for many educational expenses. The practice can, of course, claim a tax deduction for educational expenses, all the while providing its employees with a valuable, tax-free fringe benefit. Thus, everybody profits – the optometrist and, especially, the optometric practice that benefits from more knowledgeable, better educated or trained employees.