The on-again/off-again deduction Featured

9:57am EDT July 22, 2002

It may come as a surprise, but under current tax law, a company cannot take a tax deduction for underwriting employees’ MBAs.

That may soon change.

Buried in President Clinton’s recent budget proposal to Congress was a provision calling for the reinstatement of tax deductions for employer-provided educational assistance for graduate level courses, including MBAs. The reason? “Well-educated workers are essential to an economy experiencing technological change and facing global competition,” according to language in the budget proposal. Making the change “will expand educational opportunity and increase productivity.” It probably doesn’t hurt that the Oxford-educated president is among the best educated Oval Office occupants ever.

This tax provision has an odd history. As the tax laws applying to employer educational credits were originally written in the late 1970s, they didn’t apply to graduate or professional courses. Employers were free to reimburse employees for graduate work, but couldn’t take a deduction (and thus rarely offered it as a fringe benefit). In 1990, Congress changed the law so employers could deduct up to $5,250 each year, per employee, for educational assistance. Then, inexplicably, the Small Business Job Protection Act of 1996 took it away.

“This is one of those things that’s typically a victim when the Congressional Budget Office has to get the budget balanced,” says tax specialist Chris Bray, National Director of Wealth Transfer Planning for Sterling, a division of National City Bank which serves high net worth clients. The flip-flopping deduction has also been a victim of expiration dates written into the law, which lapse before any corrective action is taken.

It’s hard to tell what the impact of a reinstated tax deduction would be. At Baldwin-Wallace College, where 400 students study for their MBAs and executive MBAs while working, a recent study found that 75 percent received some type of reimbursement from their employers, says Peggy Shepard, coordinator of B-W’s graduate business programs. But those employers are mostly a who’s who of the largest companies in the area, including Key Bank, National City, Sherwin-Williams, Ameritech and the Cleveland Clinic.

For smaller, privately held employers, some think even the reinstated tax credit won’t convince too many owners to offer educational assistance, especially since the law is written to guard against discriminating in favor of highly paid employees or owners and their families. While he says that “any time you can take a tax deduction for anything, you’re more likely to do it,” tax attorney Gary Zwick says his experience with smaller clients tells him few will offer such fringe benefits. “When a small employer gets into a situation where they have to offer it to everyone, they would tend not do it.”