What expense category is Continuing Education Expenses?

In a rapidly evolving business world, knowledge is a key asset. Continuing education and professional development are vital investments for any business, enabling owners and employees to maintain and improve their skills, stay current with industry trends, and comply with professional standards. For accountants and SMB owners, understanding how to categorize these expenses correctly is essential for accurate financial management and leveraging available tax deductions.

This article will guide you through the proper expense categories for continuing education, the critical IRS rules for classification, common examples of these expenses, their tax implications, and how Fyle can automate the tracking of these important investments in your team and yourself.

Continuing Education Expense Category

Continuing education costs are considered an operating expense for a business. In an accounting system, they are typically categorized under one of the following accounts:

• Continuing Education or Professional Development: This is a very specific and clear category used by many businesses to track all costs related to upskilling and maintaining professional credentials for their team.
• Employee Training: If the education is for your employees, this is an excellent and descriptive category.
• Dues and Subscriptions: Some businesses, particularly smaller ones, may group professional development courses and seminar fees in this broader category alongside professional membership fees.
• Travel Expenses: If the education requires travel, the associated costs like airfare and lodging, should be categorized as travel expenses, while the course fee itself is categorized as education.

The choice depends on your chart of accounts, but creating a specific "Continuing Education" or "Employee Training" category is a best practice for clear financial tracking.

Key Considerations While Classifying Continuing Education Expenses

Not all education costs are created equal in the eyes of the IRS. To be considered a deductible business expense, the education must meet specific criteria. This applies whether the education is for the business owner or an employee.

The IRS lays out two key tests to determine if education expenses are deductible. The education must either:

1. Maintain or Improve Required Skills: The course or training must be directly related to and enhance the skills needed for an individual's current job, trade, or business.
2. Be Required by Law or Regulations: The education is required by law, regulations, or a licensing body to keep a professional license, status, or job. A common example is Continuing Professional Education (CPE) for accountants or Continuing Legal Education (CLE) for lawyers.

However, even if the education meets one of the tests above, it is NOT deductible if it falls into one of these two categories:

1. It's Needed to Meet Minimum Educational Requirements: Costs for education required to qualify for your profession in the first place are not deductible. For example, the cost of attending law school is not deductible.
2. It Qualifies You for a New Trade or Business: Education that is part of a program of study that will qualify you for a new profession is not deductible, even if it maintains or improves skills in your current role.

Travel expenses related to education are deductible only if the primary purpose of the trip is to attend a qualifying educational activity.

Examples of Continuing Education Expenses

To better understand the rules, here are some practical examples:

Deductible Education Expenses:

• An accountant is attending a seminar on new IRS tax regulations.
• A graphic designer is taking an advanced course on Adobe Photoshop.
• A real estate agent is completing state-mandated courses to maintain their license.
• A restaurant owner is attending a workshop on hospitality management.
• An IT professional is paying for a certification exam relevant to their current role.
• The cost of travel and 50% of the cost of meals to attend an out-of-town business conference.

Non-Deductible Education Expenses:

• A bookkeeper taking a university program to earn a CPA, which would qualify them for a new profession.
• A recent college graduate paying for a course to pass a professional licensing exam to enter a field.
• A marketing manager taking a course in landscape architecture for personal enjoyment.

Tax Implications of Continuing Education Expenses

Deductibility for the Business

If the continuing education expenses meet the IRS tests, they are fully deductible as an ordinary and necessary business expense. This includes costs for tuition, fees, books, supplies, and qualifying travel. This deduction reduces the business's net profit and, consequently, its tax liability.

For the Employee (When Paid by Employer)

When a business pays for qualifying, work-related education for an employee, the cost is a deductible expense for the business and is generally not considered taxable income for the employee. Under a qualified educational assistance program, an employer may be able to provide up to $5,250 per year in tax-free educational benefits to an employee, even for education not related to their job.

Reporting the Expense

For a sole proprietor filing a Schedule C (Form 1040), these costs can be reported under "Other expenses," with a description such as "Continuing Education" or "Professional Development." Travel costs would be reported on the travel line item.

Recordkeeping

It is essential to maintain detailed records to substantiate these deductions. As outlined in the IRS "What kind of records should I keep?" document, you should keep all receipts for tuition, books, registration fees, and any related travel expenses. You should also keep course descriptions or catalogs to prove the education's direct connection to your business or your employee's role.

How Fyle Can Automate Expense Tracking for Continuing Education

Managing the expenses associated with continuing education—from course fees to travel and supplies—can be complex. Fyle helps automate this entire process, ensuring every deductible dollar is tracked and documented correctly.

• Capture All Related Costs in One Place: Fyle can track all expenditures related to a single educational event. This includes tuition fees paid on a company card, book purchases reimbursed to an employee, and all travel expenses like flights, hotels, and meals.
• Real-Time Expense Capture: When a conference registration or flight is paid for with a company card, Fyle’s real-time feeds capture the transaction instantly, allowing for immediate visibility and coding.
• Centralized Documentation: Employees can easily attach course brochures, registration confirmations, invoices, and all related receipts directly to the expense entry in Fyle by using the mobile app or Gmail. This ensures all required documentation for tax purposes is organized and accessible.
• Project-Based Tracking: You can create a "Professional Development" project in Fyle to allocate and track all related educational costs for an employee or department, providing clear insights into your investment in training.
• Seamless Accounting Integration: Fyle integrates directly with major accounting platforms, and all categorized and documented education expenses are automatically synced to the correct accounts in your general ledger, saving valuable time and reducing manual errors.

By leveraging Fyle, you can ensure that all your continuing education expenses are efficiently managed, fully documented, and accurately reported, turning your investment in knowledge into a seamless and compliant accounting process.