Investing in education for yourself, your children, or your employees is always a smart move.
Whether you’re learning new skills to stay competitive or helping your children pay for college, the IRS does offer several tax breaks that can offset education costs. In this post, I’ll walk you through which education-related tax credits and deductions may help you, especially if you’re a small business owner.
What tax credits are available for education expenses?
There are two main tax credits available for education:
The American Opportunity Tax Credit (AOTC)
The AOTC is a refundable tax credit available for those pursuing an undergraduate degree or “recognized education credential.” White it’s mainly for traditional undergraduate students, it can still apply to a small business owner who decide to go back to school, and it can obviously also apply to your children or dependents attending college.
Here’s how it works:
- The AOTC covers qualified education expenses for the first four years of postsecondary education. This includes expenses for things like tuition, fees, books, and course materials.
- You can claim 100% of the first $2,000 you spent on education expenses and 25% of the next $2,000 you spent, for a maximum of $2,500 per student.
- Up to 40% of this credit is refundable, which means that you can get up to $1,000 back as a refund if the credit takes your tax bill to below $0.
- You’ll claim the credit by completing Form 8863 and attaching it to your individual income tax return, Form 1040.
Some restrictions:
- The student must be enrolled at least half-time.
- The credit can’t be claimed for more than four tax years per student.
- Costs for room and board, transportation, insurance, and some other student fees can’t be used towards this credit.
- Costs for expenses paid by or used for any other type of tax-free educational assistance, tax deduction, or tax credit can’t be used towards this credit (no double-dipping).
- There are income limits, so if your modified adjusted gross income (MAGI) is over a certain amount, the credit amount can be lower, or you might not be able to claim any AOTC. For instance, for tax year 2024, the full credit phases out for MAGI over $80,000 for single filers and $160,000 for joint filers and is gone completely for MAGI over $90,000 for single filers and $180,000 for joint filers.
The Lifetime Learning Credit (LLC)
The LLC is a more flexible alternative to the AOTC. This one is ideal for business owners who are going to school to build new skills or pursue a graduate degree.
For example, if you paid for an online course at an eligible institution so that you can learn digital marketing skills or take a business management course, then the LLC could apply to you.
Here’s how it works:
- You can claim 20% of the first $10,000 in qualified education expenses like tuition and required fees if the courses you’re taking help you acquire or improve your job skills. It doesn’t matter if the courses are undergraduate, graduate, or professional level (even some non-degree programs at eligible institutions qualify).
- The maximum credit is $2,000 per tax return and not per student.
- There’s no limit to the number of years you can claim the LLC.
- You’ll claim the credit by completing Form 8863 and attaching it to your individual income tax return, Form 1040.
Some restrictions:
- Unlike the AOTC, the LLC is nonrefundable, so you can only reduce your tax bill to $0 with this one, but it won’t result in a refund.
- Costs for room and board, transportation, insurance, and some other student fees can’t be used towards this credit.
- Costs for expenses paid by or used for any other type of tax-free educational assistance, tax deduction, or tax credit can’t be used towards this credit (no double dipping).
- Just like with the AOTC, this credit is phased out or eliminated completely if your MAGI is over a certain amount. For tax year 2024, the full credit phases out for MAGI over $80,000 for single filers and $160,000 for joint filers and is gone completely for MAGI over $90,000 for single filers and $180,000 for joint filers.
Can I deduct my education expenses as a business expense?
You sure can! In addition to the AOTC and LLC, which are both tax credits, some education costs can be written off as business expenses. The key to this is that the learning must meet one of these requirements:
- The learning or course is directly related to maintaining or improving the skills required to run your current business, or
- The learning or course is required by law or regulations in order to keep a current professional license you hold to run your business.
For example, if you’re taking a photography course to learn new photography skills that you’ll use in your photography business, you can deduct the cost of the course as a business expense.
Additionally, even if your business is photography, if you’re taking a course to help you understand business finances and taxes (ahem, so important!), you can deduct the cost of this type of course too since it’s helping to improve your business.
However, if you’re taking a course to learn how to make jewelry because you hope to open a handcrafted jewelry business one day, you can’t deduct the cost of that course since that isn’t a business expense for the business you’re running now.
One other thing to note here is that if the education you’re getting only meets the minimum educational requirements for your current trade or business, you can’t deduct that expense. In other words, the education should be to improve or maintain the skills and knowledge you already have and not to simply obtain the baseline skills or knowledge you need for your current career.
What types of educational expenses can I deduct as a business expense?
The good news is that the types of education expenses that can be deducted as business expenses encompass more expenses than what is allowed for the education tax credits we discussed earlier.
You can deduct the cost of:
- Books
- Lab fees
- Research fees
- Subscriptions to professional or trade publications
- Supplies
- Transportation and travel costs to get to and from the learning environment
- Tuition
If you’re unsure if your education expenses are deductible, the IRS has an online tax tool that you can use for help. You can also reach out to an accountant who is experienced in working with small businesses.
Are there other education-related tax breaks for small business owners?
In addition to tax credits and deductions, there are some other tax breaks you may want to keep your eye out for when it comes to paying for education for yourself or your dependents:
- Section 529 Plans: Saving for your child’s education through a 529 plan is a smart way to save tax-free.
- Employer Educational Assistance: If you have employees, you can provide them tax-free educational assistance up to a certain amount per year. This is a great fringe benefit to offer your employees (and even yourself if done correctly!) that can help reduce the cost of education while also reducing your business’ taxable income.
- Student Loan Interest Deduction: As an individual, you may be able to deduct up to a certain amount of interest you paid on qualified student loans if you’re the person legally obligated to repay that loan. Ask your accountant if you need help claiming this deduction.
Can I claim an education credit and write off my education costs as a business expense?
Yes, you may potentially be able to claim some education expenses for a tax credit and others as a business expense deduction, but only if they are for clearly separate purposes. The IRS doesn’t allow double-dipping!
Let me give you an example of how this could work:
Let’s say you’re a freelance graphic designer and you take a certification course in Adobe Photoshop to improve your existing skills. This education is directly related to your current business, so you can absolutely deduct this as a business expense on your business taxes.
Now let’s say that you also take a college course in marketing for personal development or toward a degree. This education expense might qualify you for the Lifetime Learning Credit on your personal taxes. Just remember that you can’t also then write this off as a business expense.
Abridged by Amy
Education is a solid investment not only in your business but also in your financial well-being. Fortunately, the IRS offers education-related tax credits and deductions that reward lifelong learners like you.
If you’re unsure about whether it would be smarter to take a tax credit or deduct your education expenses as business expenses, then talk to an accountant who can help you crunch the numbers to make sure you’re taking full advantage of these opportunities and potential tax savings.
