Independent Contractor and Continuing Education Expenses

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Taxpayer asks:

Wow, your website is really helpful!

I have some Independent Contractor/Schedule C questions:

Is it possible to deduct "professional development" costs? i.e. things I did or classes that I took that make me better at doing what I do as an individual in my very small business. My father thought it would be deductible, but he was not sure what line. He did think that course work required for the job was not deductible. i.e. the education class that I took in order to keep my certification. However, he thought the non-required course work was deductible. Is this true?

If so, on what line can I deduct it on Schedule C?

Can I deduct the required graduate course on the 1040 form on line 50 "education credits" ?

Thank you so much.

Taxgirl says:

Thanks for the nice words!

Someday, I plan to do a long post all about who qualifies as an independent contractor. Just because.
But for now, I'll just answer your questions…

You can indeed deduct expenses incurred in maintaining your current employment, but I'm afraid your father seems to have it a little backward. Continuing education requirements, such as lawyers who are required to take annual CLEs (certified legal education credits) or certified public accountants who are required to take similar credits, in order to maintain a professional license, are deductible. Similarly, refresher courses, courses on current developments, and academic or vocational courses are deductible.  For most folks, these would be considered unreimbursed job expenses and would most likely be listed on Schedule A; you will be subject to the normal limits for itemized deductions.  In contrast, for those persons who are self-employed, like you, most of these expenses will be listed on Schedule C.

You cannot, however, deduct expenses that you have simply to meet the minimum requirements of your present trade or business. I couldn't deduct the cost of my undergraduate education or my JD (law school) degree. And you can't deduct expenses in order to start a new trade or business – those pottery classes that I want to take, for example, aren't deductible even if I'm convinced that pottery is my new calling.

However, you can deduct the costs of "qualifying work-related education". It qualifies if the education is required by your employer or the law to keep your present salary, status, or job and the education maintains or improves skills needed in your present work. And yes, you can deduct these expenses even if the end result is a degree.

Let's use me as an example. The costs to earn my Bachelors and my JD are clearly not deductible expenses (though the interest that I pay each month for what feels like the rest of my life to pay my student loans might be, assuming that I qualify under the income and other requirements). But my LLM in Taxation (Masters of Laws) is a little different. My employer at the time required me to complete my LLM. It was related to my job as a tax attorney.  Therefore, it met the requirements of the law for deductibility even though at the end, I received a degree.

So, what exactly can you claim if you qualify?  Well, mileage for one, which is interesting since commuting expenses for work are not deductible.  But, you can claim a business deduction for travel to and from work-related education to the tune of 44½ cents a mile for 2006.  And in a nod to the fact that not everyone drives everywhere all the time, you can also deduct transportation expenses including the actual costs of bus, subway, cab, or other fares.  If there are meals or lodging involved, you treat those not as transportation expenses but as entertainment/dining/travel expenses subject to the regular limitations.

It's all-important to remember that if you are self-employed, as opposed to an employee, you will deduct these expenses directly from your self-employment income for purposes of income tax and SE (self-employment) tax. In other words, as noted above, you'll file these expenses on your Schedule C.

Your work-related education expenses may also qualify you for other tax benefits, such as the tuition and fees deduction and the Hope and Lifetime Learning Credits. And the good news is that you may qualify for these other benefits even if you do not meet the requirements for a "work-related education expense. It's also possible that you can claim a combination of benefits, depending on your individual circumstances (i.e. Hope Credit and education deduction) – the rule is that you must use different expenses to achieve those benefits.

(NOTE: The TCJA has made changes to employee-related deductions on Schedule A. The TCJA did not affect deductions on Schedule C.)

Before you go: be sure to read my disclaimer. Remember, I'm a lawyer and we love disclaimers.
If you have a question, here's how to Ask The Taxgirl.

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Source: https://www.taxgirl.com/2007/04/03/ask-the-taxgirl-independent-contractor-questions/

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