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Tax Talk: Deducting Educational Expenses

Posted: Oct. 31, 2011, 2:00 p.m. EDT

Accruing benefits via tax breaks can boost business and help fuel growth.
By Mark E. Battersby

When it comes to smarter workers, everyone benefits under current tax laws. The pet store business prospers with smarter, better-trained employees—and a tax deduction if it foots the bill for employees’ educational costs. Smart employees reap a tax deduction for some of their educational expenses, and are often rewarded with higher pay, promotions or more opportunities. When a product manufacturer, distributor or wholesaler provides the training or education, both the worker and the pet store owner benefit, while the manufacturer, distributor or wholesaler enjoys a tax deduction.

Many owners and managers have long realized that one of the major assets for a pet store is its employees. As is the case with most business assets, the pet products operation usually has quite a bit of money invested in hiring and training a worker. A smart store owner realizes that improving a business asset can reap rewards far exceeding the cost of any improvements made to it. Similarly, workers improve with additional training or education.

Basic Smarts
At its most basic, a pet retailer training a new worker, or training an existing worker for new duties, incurs what our tax laws consider “ordinary and necessary” business expenses, expenses that are tax-deductible. It is when expenditures are made for training or education by others, or outside the business, that the tax rule complexities kick in.

It matters little whether an individual is an employee, is self-employed, or an employee of his or her own pet store or business. Tax deductions and unique write-offs abound under tax laws and regulations for anyone willing to look for them—or seek direction from an expert. In fact, under these same tax rules, many educational and training expenses incurred by a business are both tax-deductible by the business and, at the same time, tax-free to the recipients.

That’s right: A pet retailer 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 business owners if it can show that the education or training “maintains or improves skills required in the trade or business,” or that it is required by law or regulations for maintaining status, a job, or a license to practice.

The Employer Pays
Tax law states that payments of up to $5,250, received by an employee for tuition, fees, books, supplies, etc., under an employer’s educational assistance program may be excluded from the employee’s gross income. Educational assistance also includes employer-led courses for employees.

education

Remember however, the tax law requires an actual “plan,” although those rules do not require funding to pay for the plan’s educational benefits. In fact, most businesses with a plan pay the educational benefits out of the operation’s general assets. Naturally, the benefits paid to participants cannot be conditional on their making contributions to the plan.

Under the tax rules, no educational assistance plan or program is permitted to pay more than five percent of its benefits to principal shareholders or owners of the pet store or business. Plus, the business must provide “reasonable” notice concerning the availability and terms of the plan to all eligible employees.

Worker Basics
With an Internal Revenue Service-approved educational plan, payments for educational expenses are excludable from the gross income of the employee. What’s more, the tax rules permit employees to exclude as “working condition fringe benefits,” any amounts that are not excludable from their gross income under the basic plan. In addition, all payments made by a pet store, or any business with a similar plan, are tax-deductible as ordinary and necessary business expenses.

An employee itemizing deductions may be able to also claim a deduction for the expenses paid for work-related education. The deduction will be the amount by which qualifying work-related education expenses plus other job and certain miscellaneous expenses is greater than 2 percent 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 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
The costs of qualifying, work-related education can often be deducted as business expenses. This is education that meets at least one of the following two tests:  The education is required by an employer or 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; Or, the education 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 to qualify for a new trade or business.

Even better, an individual can deduct the costs of qualifying work-related education as a business expense even if the education could lead to a degree.
 
Although an individual is already employed, it does not always mean the minimum requirements for qualification in that employment have been met. However, if new education requirements are established after the individual has met the minimum requirements for qualification in his work, the expenses incurred in meeting the new requirements will be tax-deductible.

Education Pays, Not Costs
Training and education are vitally important for every retailer in order to ensure the success and continued profitability of the pet products operation. Those training and educational expenses, whether paid for by the pet retailer or employer, by a supplier or equipment distributor, or subsidized or sponsored by an industry group or association, can be considered fringe benefits because they are, for the most part, tax-free to the recipient.

The employee, employee-owner or self-employed store owner being trained or educated enjoys an offsetting tax deduction for those educational expenses that are not covered by the employer or business. Thus, everybody profits, especially the pet store or business that will benefit from smarter, better educated or trained employees, and will be able to claim a tax deduction for educational expenses paid all the while providing the operation’s employees with a valuable, tax-free fringe benefit.

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