In this episode of Coffee with Carl, attorney Carl Zoellner explains how to write off education costs as business startup expenses.
Updated September 3, 2020
If you’re considering starting a new business, you may need to pay for education to learn about a new field, like stock market or real estate investing. Many people are under the impression that the money they’ve spent on education is just gone. If this is you, keep reading.
While expensing education costs can be incredibly valuable, calling it “education expenses” is somewhat of a misnomer. When we say “education expenses” you’ve incurred in learning about a new business venture, what we really mean is “startup costs.” Regardless of the type of new business you’re starting, there are probably going to be education expenses related to learning about this new field or endeavor. One of the biggest hurdles for new business owners, however, is being able to expense these education costs.
For example, let’s say I enroll in a real estate education course for $50,000. Some CPAs will suggest taking that $50,000 education expense on your Schedule C. To me, this is a risky move because it increases your audit risk. So that’s a no-go.
In my opinion, the best way to go about this is to set up a traditional C corporation. With your newly-formed C corporation, you can include education costs as a startup expense to the business. Although I’m referring to these “education expenses,” what we’re actually capturing is the business’s startup costs. If you paid out-of-pocket for the expenses, then this money would be due back to you as a reimbursement from your C corporation.
How It Works
Let’s return to my previous example of $50,000 in education expenses. To capture this as a business startup cost, I need to set up my C corporation within 6-8 months of actually incurring the education expenses. The sooner I establish the C corp, the better. After 6-8 months, attempting to capture “startup costs” to the business becomes more suspect in the eyes of the IRS. Although there are no IRS guidelines stating how long a business has to claim startup costs, our experience at Anderson suggests 6-8 months is the best window for success.
Your C corp can then deduct $5,000 in the first year. The rest must be amortized by the C corp over the next 180 months.
However, if you paid out of pocket, that full reimbursement will be due back to you as soon as the C corporation has the cash available.
Watch as Carl explains how to capture education expenses as business startup costs with a traditional C corporation.
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