Professional education can provide tax benefits

Optometry practices can attract and retain employees by providing this fringe benefit.

Issue: March 2017

ByMark E. Battersby

While most optometric professionals are all-too-familiar with continuing professional education, far too many ignore the impact of education on the optometric practice’s employees – one of the major assets of every practice.

When it comes to smarter workers, everyone benefits, thanks in large part to our tax laws. The optometric practice prospers with smarter, better-trained employees – and a tax deduction – when the practice foots the bill for employee education or training costs. Those smarter employees, along with the practice’s principal(s), can reap tax deductions for the education costs they foot.

It little matters whether an optometrist is self-employed, an employee of his or her own optometric practice or simply an employee, tax deductions and unique write-offs abound for anyone willing to look for them or seek direction from an expert.

Of course, 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. Review courses such as those to prepare for the bar or certified public accountant examination, unfortunately, are not qualifying work-related education but, rather, part of a program of study that qualifies someone for a new profession. This is true even if the education maintains or improves skills required in the present employment.

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 (CPE), for example, is considered an educational expense.

Employers paying

A key question in many optometry practices is whether the education-related benefits paid by the employer are deductible from the employer’s business taxes and, probably even more important, whether the benefits are taxable to the employee.

For employers, the amount paid or reimbursed for an employee’s education expenses is a tax-deductible business expense. As an added bonus, if the educational expenses qualify, employees may be able to exclude the payment or reimbursement from their gross income as a working condition fringe benefit.

Educational assistance programs allow employers to provide employees with educational assistance of up to $5,250 annually that can be excluded from the employee’s income. Employers can claim a business deduction for educational employee benefits they pay without paying FICA (Federal Insurance Contributions Act) or FUTA (Federal Unemployment Tax Act) payroll taxes for benefits provided under the program.

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An educational assistance program is a separate written plan that provides educational assistance to the practice’s employees. These expenses usually include the cost of books, equipment, fees, supplies and tuition. And, although the tax law requires an actual “plan,” the rules do not require an employer to actually fund the plan. In fact, most practices with a plan pay the educational benefits out of the practice’s general fund.

However, only payments or reimbursements made under an accountable plan can be excluded from an employee’s income. The requirements of an accountable plan include the following:

The education expenses paid or reimbursed must be work-related;
The employee receiving the benefit must adequately account for the expenses to the employer; and
Excess payments must be returned to the employer.

If the payment or reimbursement is not made under an accountable plan, an employee may still claim job-related educational expenses as a miscellaneous itemized deduction on his or her personal income tax return. It is not, of course, excluded from gross income, and those amounts are considered to be compensation subject to withholding and payroll taxes.

The fine print

As mentioned, the tax rules require a separate written plan, a plan that cannot discriminate in favor of employees who are principals, officers or highly compensated, or their spouses or dependents. The rule is that 5% or less of the educational assistance paid annually by an employer may be provided for principals with more than a 5% interest in the optometric practice or their spouses or dependents.

The nondiscrimination requirement does not mean that educational assistance must be offered to all of an optometric practice’s employees. An employer is free to cover only certain classes of employees as long as by doing so there is no discrimination in favor of the employees listed above.

What happens if the optometry practice provides an employee with more than the $5,250 allowed by the educational assistance program? An employer can deduct the entire amount paid for the employee’s educational costs as a business expense. However, only $5,250 will not be considered wages and, therefore, not subject to payroll taxes. Amounts in excess of the annual limit are subject to both income and payroll (FICA and FUTA) taxes. Employees must treat everything received over $5,250 as income, unless these amounts qualify for exclusion from income as work-related education or are deductible as job-related educational expenditures.

Employee write-offs

For tax purposes, education expenses are included in the recipient’s “working condition fringe benefits” on the annual tax return. However, in order to be excludable from the income of an employee as a working condition fringe benefit, all of the following must apply:

The benefit must relate to the employer’s business;
The employee would have been entitled to an income tax deduction if the expense had been paid personally;
The business- or practice–related aspect must be substantiated with records; and
If an employee is reimbursed in cash, the practice must require verification of the expense.

In addition, the educational course must not:

Be needed to meet the minimum educational requirements of the current job or
Qualify the employee for a new trade or profession.

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Many employers already provide educational benefits for employees. Some of these benefits are for CPE, to maintain licenses or permits, or to gain new skills, credentials or degrees that benefit both the employee and employer. Self-employed optometric professionals or business owners may also be able to deduct their education expenses.

Tax benefits for all

An employee who itemizes his or her deductions may be able to claim a deduction for the expenses paid for work-related education. The deduction will be the amount by which the qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for impairment-related work expenses of disabled individuals) is greater than 2% of the individual’s adjusted gross income. An itemized deduction reduces the amount of income subject to tax.

For a self-employed optometric professional, expenses for CPE or other work-related education are deducted directly from self-employment income. This reduces the amount of income subject to both income and self-employment tax.

Work-related and non-work related education expenses may also qualify for other tax benefits such as the American Opportunity and Lifetime Learning tax credits. In fact, qualifying for these tax benefits is feasible even if the other educational expense deduction requirements are not met.

The American Opportunity Tax Credit (AOTC) is a unique tax credit, a direct reduction of the final tax bill rather than a reduction of the income on which that tax bill is based, which is available for tuition, enrollment fees and even course material for the first 4 years of post-secondary education up to $2,500, each year.

Anyone claiming this credit must have modified adjusted gross income under $90,000 ($180,000 for joint filers) and cannot have already claimed the AOTC or the former Hope Credit for more than 4 tax years. Forty percent of this credit may be refundable, meaning that with a tax bill of zero, the IRS will pay you.

The Lifetime Learning Credit (LLC) was designed to help pay for undergraduate, graduate and professional degree courses, including courses to acquire or improve job skills.

This credit equals 20% of the first $10,000 of qualified education expenses with a maximum of $2,000 per return. Because the LLC is not refundable, it can be used to reduce the annual tax bill, but not to generate a loss or a refund. There is no limit on the number of years the credit, worth up to $2,000 per return, may be claimed.

Regardless of who “foots” the bill for education, the rewards of smarter, better-trained employees are something every optometry practice can reap. Both optometrists, their practice and their employees can help reduce the cost of CPE compliance and other education with tax breaks. Education also makes an excellent fringe benefit every optometry practice can employ to attract and retain employees.

For more information:
Mark E. Battersby has been reporting on news and developments in the tax and financial arenas for more than 25 years. He can be reached at MEBatt12@Earthlink.net.

Disclosure: Battersby reports no relevant financial disclosures.