Education - start up expense or nondeductible qualify for new profession?

[KJ Judd]

Client was a clinical psychologist. In 2006 he decided to start his own coaching business. He took thousands of dollars of additional education to be "more effective" at coaching in 2006 & 2007.

He filed his LLC & started coaching in Jan 2007. He wants to take last years (2006) training as start-up expenses. He's arguing he's already qualified to coach that this qualifies as continuing education.

My concern is the magnitude of the expenses. We're talking over $10k last year including travel & meals plus and additional $20k this year. He's gross revenue is only $7k this year.

Also, is there a limit how far before the business begins that you can accumulate start-up costs? He has expenses (office supplies, cell phone, computer expenses, etc.) going back to January.

My "excessive deduction" meter is going off.

[BOB W]

Could you be more specific when you say "Coaching">>> What type of coaching?

[Zee]

IMHO, if this training qualified him for a new trade or profession as a "coach", the classes aren't deductible at all. You've also indicated he took the classes in 2006 prior to starting his LLC to provide the "coaching" services to improve his skills before starting the business. Which skills? Those of a clinical psychologist, or "coach" (whatever that is). How can he improve his skills as a "coach" if he isn't one? If you do decide this is a startup expense, it must be amortized over 60-months. If the expense improved his current job skills, it's a misc itemized deduction subject to the 2% rules. If the expense qualified him for a new profession as a coach, I don't think they're deductible at all. Once he started offering and providing services, they are probably deductible as continuing education.

If the client disagrees with you, this is one of those situations where a disclosure might be required (Circular 230 can be PITA can't it?)

But, what do I know? Maybe you should have your client ask Smart Money magazine (I'm still fuming over that article in case you haven't read it in another string...LOL)

[KJ Judd]

Coaching, not of the sports variety, but of the business or personal coach type.

You are echoing what I'm thinking that these aren't deductible. I like how you phrased it Zee, how can you improve your skills if you're not already a coach.

When you run two sets of rules education & start-up together, I wanted confirmation that I'm not being too conservative here. I do want my client to get all the deductions he's entitled to, but it needs to be a supportable position.

Any other thoughts on the matter are greatly appreciated.

[Gene V]

A few words from J.K. Lasser’s Your Income Tax

If you are practicing your profession, the cost of courses leading to a specialty within that profession is deductible. For example, a practicing attorney may deduct the cost of a master’s of law degree program (LLM).

EXAMPLES

1. A practicing dentist returned to school full time to study orthodontics while continuing his practice on a part-time basis. When he finished his training, he limited his work to orthodontics. The IRS ruled he could deduct the cost of his studies. His post-graduate schooling improved his professional shills as a dentist. It did not quality him for a new profession.

2. A practicing psychiatrist may deduct the cost of attending an accredited psychoanalytic institute to qualify to practice psychoanalysis. A social worker has also been allowed a deduction for the cost of learning psychoanalysis. In one case, the Tax Court allowed a psychiatrist to deduct the cost of personal therapy sessions conducted through telephone conversations and tape cassettes. The court was convinced that the therapy improved his job skills by elimination psychological blind spots that prevented him from understanding his patients’ problems.

[thomtax]

A few words from J.K. Lasser’s Your Income Tax

improved his professional shills as a dentist.

I always suspected that, at the prices they charge, these dentists were shilling for some questionable operation. :-)

Hope your season is going well.

[gkaiseril]

A few words from J.K. Lasser’s Your Income Tax

If you are practicing your profession, the cost of courses leading to a specialty within that profession is deductible. For example, a practicing attorney may deduct the cost of a master’s of law degree program (LLM).

Patent and Copyright attorneys need to take an exam form the U.S. PTO and have am LLM. So they may not get the eduction because of the special license. Much like an accountant obatining a CPA certification and license.