Current federal tax laws contain a variety of educational deductions for any business, which includes your Internet service. Are you taking a tax break today?

by Mark E. Battersby [January 30, 2001]

One of the first programs introduced by President George W. Bush was his much ballyhooed plan for education. Even before the new administration began banging the drum for institutional reforms, most industry professionals were already aware of just how much value the Federal government places on education. In fact, our lawmakers have created a number of tax deductions for educational expenses.

That's right, our tax laws contain a variety of deductions for any business, which includes your Internet service. The Federal government will foot most of the bill for educating both the ISP operator and the operation's employees. Those same laws also contain a unique provision, which makes employer-paid or reimbursed educational expenses tax-free to the recipient.

Government approved double-dipping
A largely ignored provision of our tax law permits every ISP business to claim a tax deduction for any money spent educating or training employees. Even better, the recipient of this training or educational expense reimbursement is frequently permitted to ignore the amounts paid by the employer when computing his or her personal income tax bill.

Under current tax rules, educational expenses are generally tax deductible (even if they lead to an advanced degree) by the one who pays. For an individual, the deduction for educational expenses is available whenever that education is undertaken:

• To "maintain or improve" a skill required by the his or her employer,
• To meet the requirements of law or regulations,
• To meet an imposed condition for retaining an already established employment relationship, status or rate of compensation.

On the other side of the coin, if those expenditures for education are required in order to meet the minimum educational requirements for job qualification; or for education that qualifies the taxpayer for a new trade or business, then they clearly fall into the category of nondeductible capital or personal education expenses.

The mere fact that a taxpayer is already employed does not necessarily mean that they have met the minimum requirements for qualification in that position. Naturally, if new educational requirements are established after someone has already met the minimum requirements for qualification in his or her work, they will be treated as continuing to meet those requirements. Thus, expenses incurred in meeting the new requirements are deductible.

Qualifying caveats
Keep in mind, however, that a mere change in duties is not a new trade or business if the new duties involve the same general work as is involved in your present position.

An ISP owner will usually foot the bill for any in-house training of employees as well as provide the space, supplies or equipment for supplier-financed training.

The ISP operator may even pay the expenses of employees attending college or technical schools. In most cases, the ISP business can deduct those educational expenses on its tax return.

The beneficiary of this training, the employee—or, in some cases, the ISP operation's owner—may qualify for a tax deduction on his or her personal income tax return that, in essence, makes those educational benefits and reimbursement plans tax free.

Allowable expenditures
More and more ISP owners are beginning to pay their employee's educational expenses as a fringe benefit. Regardless of what type of education is involved or whether that education will qualify the individual for a new trade or profession, the employer can pay—and deduct—the educational expense while the employee ignores that expenditure, at least for tax purposes.

Payments of up to $5,250 per year 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. Any excess is included in the employee's gross income and is subject to employment and income tax withholding.

Although the courses covered by the ISP's educational plan need not be job related, courses involving sports, games or hobbies may be covered only if they involve the employer's business. Unlike the ISPs basic deduction for educational expenses, apprenticeship programs, on-the-job training and the like, educational expense reimbursements require a formal plan—especially if they are to be excluded from the recipient's income.

Great gains
Training and education are virtually mandatory in order to insure the success and continued profitability of most ISP operations. Those training and educational expenses, whether paid by the ISP as a primary employer, by a supplier or equipment distributor, subsidized or sponsored by an industry group or association remains, are essentially tax-free to recipients.

The individual being trained or educated, be it an employee, employee-owner or self-employed ISP operator, enjoys an offsetting tax deduction for those educational expenses that are not exempt from taxes. In other words—everybody profits.

Ain't education grand? And the accompanying tax deductions aren't bad either.

— End