Tax Tips Part I

Tax Tips for the Professional Dance Business

By Ma*Shuqa Mira Murjan

Professionals dancers in the U.S. have recently re-emereged from the annual maze of Internal Revenue Service tax forms. This series of articles is designed to aid professional dancers, who earn an income from dancing and/or teaching dance, in becoming informed about the latest tax rules that apply to them. The articles will discuss the following employment-related expenses that are deductible as miscellaneous deductions: educational expenses; travel expenses; auto expenses; entertainment expenses; home office/studio; research expenses; books, supplies and equipment and other subjects related to job maintenance.

 

Deducting Educational Expenses

This first article in the series will discuss educational expenses. The expenses of attending classes are deductible provided that certain conditions are satisfied. These conditions are designed to permit an individual to deduct schooling which aids her in her current occupation, such as a weeklong seminar for a dance teacher, but to rule out schooling which prepares her for a new career.

When are expenses of attending school deductible? You may deduct the cost of attending dance classes, workshops and seminars if your attendance is for any one of the following purposes:

1) Maintaining or improving skills required in your present employment;

2) Keeping your current employment, status, or salary;

3) Meeting the express requirements of your current employer.

However there are two exceptions. Your expenses cannot be deducted if either of the two rules apply:

Rule A: The courses are required in order to meet the minimum educational requirements for your employment;

Rule B The education would qualify you for a new trade or business. A change of duties is not considered as being a new trade or business if the new duties involve the same general work that you did previously.

You may have several purposes for attending classes, workshops and seminars. If Rule A or B listed immediately above is among your reasons, then you may not deduct your educational expenses.

There is one further requirement. You must be considered a current member of your profession at the time you incur the educational expenses. This does not mean you must actually be employed at the time. If you were employed prior to the education and intend to resume employment in the same general profession, then your expenses may still be deductible.

Education Which Maintains or Improves Skills

If you incur expenses for education which maintains or improves your professional skills, these expenses are deductible provided they are not disqualified under either the minimum educational requirements for employment of Rule A, or the new trade or business of Rule B. To qualify, the educational classes must be in the subject matter related to your teaching, research, or other professional performance duties. For example, a dance teacher would be allowed to deduct expenses for taking a course of dance classes from an Egyptian dance instructor in Egypt, because the classes contribute to the improvement of her teaching skills and knowledge base.

Education which contributes to your general education but is not directly related to your professional duties does not qualify for deduction. For example, a dance instructor would not ordinarily be allowed a deduction for taking a course in tax law. However, if there is an employment-related reason for you to take courses outside your area of expertise, then your expenses can be deductible. For example, if you were a member of a college whose faculty were encouraged to take courses to expand their expertise due to shifting enrollment and program needs, then the education would be sufficiently related to your professional duties to qualify for a deduction. Thus, as a member of the faculty in the areas of business and education, courses in educational finance and taxation are related to my professional endeavors to maintain current employment in my “other professional life”.

Education Which Maintains Your Current Employment, Status or Salary

You may deduct expenses for education which meet the express requirements for maintaining your employment, status, or rate of compensation, provided the education does not fall under the minimum requirements of Rule A or the new trade or business of Rule B. For example, suppose a teacher has already met the minimum requirements for employment but the educational institution requires that periodic refresher courses or other education be taken to retain employment (as in the case of continuing education courses required in professions that require state or professional board licensing e.g. nursing, optometry, dentistry). Then, these expenses are deductible. Similarly, educational expenses are deductible if the education is required in order to avoid demotion or other loss of status. Thus, a teacher can deduct required courses if the requirement is imposed on her right to continue in the profession.

 

Education Which Meets The Express Requirements Of Your Employer

You may deduct expenses which meet the express requirements of your employer as long as the requirements have been imposed for a bona fide purpose. Again, the education must not fall under the minimum requirements of Rule A or the new trade or business of Rule B. The requirements must be identifiable in some sort of policy. General encouragement alone will not constitute as an express requirement. However, even if your employer fails to enforce the rule, you can still normally take the deduction.

Deductions Disallowed under Rule A

Rule A states that you cannot deduct education which is required in order to meet the minimum requirements for employment in a new job. You may accept a job for which you do not meet the minimum educational qualification, but you are hired temporarily or provisionally pending fulfillment of those requirements. If you then take courses in order to meet these qualifications, then you may not deduct your expenses. However, if you meet the minimum educational requirements that are in effect when you are first employed in a job, and those qualifications are raised later, then you may deduct expenses for courses taken to satisfy the new minimum qualifications (for example, nursing jobs later requiring the BSN, and university teaching jobs requiring the Ph.D.).

What Are Minimum Educational Requirements? The IRS issued the following regulation defining what is meant by minimum educational requirements for teachers:

“The minimum educational requirements for qualification of a particular individual in a position of an educational institution is the minimum level of education which under the applicable laws or regulations in effect at the time this individual is first employed in such a position. If there are no normal requirements as to the minimum level of education required for a position in an educational institution, then an individual in such a position shall be considered to have met the minimum educational requirements for qualification in that position when she becomes a member of the faculty of the institution. The determination of whether an individual is a member of the faculty of an educational institution must be made on the basis of the particular practices of the institution. However, an individual will ordinarily be considered to be a member of the faculty of an institution if: a) she has tenure or her years of service are being counted toward obtaining tenure; b) the institution is making contributions to a retirement plan (other than Social Security) in respect of her employment; or c) she has a vote in faculty affairs.” {Reg. Sec. 1.162-5(b) (2)}

Deductions Disallowed Under Rule B

Rule B states that you may not deduct expenses for education which will qualify you for a new trade or business. A change of duties does not constitute a new trade or business if the new duties involve the same type of work that she was formerly doing. Furthermore, all teaching and related duties are considered to involve the same general type of work. For example, none of the following changes may be considered to constitute a new trade or business:

a. change from teaching beginning to advanced level students

b. change from teaching one subject to teaching another

c. change from teaching to providing career guidance

d. change from teacher to dance institution administrator

Note that the above does not explicitly state that you can deduct the expenses for education required to make the above changes. It only states that these education expenses are not automatically excluded from being deductible. For example, you would need to be able to justify to the IRS that the education is related to your current teaching of dance Orientale; such as the applicability of classes in Hawaiian-Oriental dance, Arabic percussion or Modern Persian music to the broadening of your understanding of the principles and concepts underlying successful dance performance and teaching.

In other words, Rule B eliminates a deduction for education which qualifies you for a new trade or profession. It does not matter if you actually make the switch, a deduction is ruled out. For example, if you attended law school, medical school or a program in computer science and did not intend to become a lawyer, doctor or software engineer, but rather use the education in your current profession of dance, Rule B would prevent a deduction. The gist of the IRS ruling on cases of individuals studying in areas outside of their profession is that if the education is different than the employment they had before and degree conferred qualified them for this new profession, they were not permitted to deduct their educational expenses whether or not they actually entered the new profession. If a dancer pursued a degree in ethnomusicology and began to teach Arabic percussion; then the educational expenses might be disallowed and not deductible according to Rule B.

Current Member in the Dance Profession

An additional requirement for deductibility is that the education be undertaken when you are a current member of your profession. If you are actively teaching, on vacation, or on a temporary leave of absence, then you are considered to be a current member of the teaching profession. But if you leave your profession for an indefinite period of time, then you may not deduct expenses related to that profession. This is the case even if you return to the profession at a later date. Therefore, it is important to establish that you are a current member in the dance profession. There are several ways that you can evidence your commitment as a member of the profession:

a) Advertise your dance instruction

b) Contribute to your profession (research, organizing, participating and giving seminars and workshops, writing articles and books)

c) Hold membership in professional associations

d) Subscribe to dance publications

If you temporarily leave your profession for a fixed period of time to take courses that maintain or improve your skills, then these expenses are eligible for deduction. If is not necessary that you be on official leave of absence or even that you plan to return to the same job. However, you must plan to resume employment in the same field you left. Therefore, if you went to live in Egypt to study the dance, but did not perform, did not maintain your membership in the profession, and did not return to the dance profession upon your return to the United States; then your education related expenses while in Egypt are not deductible.

The IRS had been following the general policy of considering any period exceeding one year, as an indefinite period of time. Thus, education requiring an absence from work for more than a year was considered non-deductible. But the Tax Court has thrown out this one-year policy as being arbitrary and unjustified. In several court cases, they have permitted a deduction for full-time study lasting 2 or 3 years. The key to qualifying for deduction is that education is sufficiently related to your profession. The extended length of time required to complete the education is no barrier.

If you leave your profession temporarily, you should still list that profession on the Occupation line on your tax form. A recent court decision denied an educational deduction to a registered nurse who went back to school after a long period of time during which she was unemployed. The denial was based on the Court’s conclusion that she was no longer in the nursing profession when she undertook the education. It stated that the fact she did not consider herself a nurse at the time was “demonstrated by the fact that she listed her occupation on her Federal income tax returns for those years to be that of a student and housewife.” How have you listed your occupation on your income tax returns?

Which Expenses Are Deductible?

If your education qualifies for deduction, you may deduct tuition, fees, books, supplies, photocopying, and other related costs.

Transportation Expenses To and From School: You may deduct transportation expenses for qualified educational activities that you incur in going between:

1. the general area of your principal place of employment and a school located beyond the general area, or

2. your place of employment and a school within the same general area.

For example, if you attend a weekend seminar or weeklong workshop in another city; if your educational expenses are deductible, you may deduct your round trip transportation expenses, including airfare, tolls and parking fees, taxis, rental cars and mileage charges.

You may not deduct the cost of local transportation between your residence and a seminar location if the class is taken on a non-working day as this expense qualifies as personal commuting expenses. You may only deduct the cost of going from your job to the dance classes if you go directly to the classes after work, especially if your place of employment is located in your home studio.

You cannot deduct transportation between your residence and dance classes during a period of unemployment.

Travel Expenses While Away from Home Overnight: Perhaps you attend a workshop or seminar out of town to obtain education that qualifies for deduction. You are governed, in this case, by the rules for deducting travel expenses (as will be described in a later article). The IRS describes the general situation concerning travel away from home overnight to obtain education:

“If you travel away from home primarily to obtain education the expenses of which are deductible, you may deduct your expenditures for travel, meals (subject to the 80% Rule, to be described in a later article), and lodging while away from home. However, if you engage in incidental personal activities, such as sightseeing, social visiting, or entertaining, the portion of your expenses attributable to those personal activities are nondeductible.

“If your travel away from home is primarily personal, your expenditures for travel, meals and lodging (other than meals and lodging during the time spent on deductible educational pursuits) are not deductible.

“An important factor in determining whether a particular trip is primarily personal or primarily to obtain qualifying education is the relative amount of time devoted to personal, as compared with educational activities.”

For example, if you traveled to Richmond, California to take the Rakkasah weeklong dance seminar, the cost of which is deductible, and while there, you took a sightseeing trip to San Francisco Chinatown and Fishermen’s Wharf areas, entertained some personal friends, and took a side trip to Petaluma to see Bert Balladine for a day, your transportation to Richmond and back are deductible, but your transportation expenses to Petaluma and San Francisco are not. You may deduct only 80% of meals and lodging allocable to your educational activities while taking the Rakkasah dance seminar in Richmond.

Travel outside of the United States will be discussed in a following article specifically addressing travel expense deductions. Further information on the requirements for deducting and keeping records of travel expenses will be reviewed as well.

Where Do You Deduct Educational Expenses?

Educational expenses incurred by an employee in connection with her job are claimed on Form 2106, Employee Business Expenses. The total of expenses computed on Form 2106 is claimed on line 20 of Schedule A as a miscellaneous deduction, and when aggregated with other miscellaneous deductions, subjected to a 2% of Adjusted Gross Income floor.

Educational expenses connected with a self-employment activity are claimed on Schedule C or Schedule C-EZ. This has the advantage of escaping the 2% floor and being available to those who claim the standard deduction as well as to those who itemize.

This series of articles on taxation and dance business expenses is designed to assist you in managing the reporting and record keeping required by the IRS. However, note that you cannot deduct business expenses that would be a greater amount than you earn from dance. To do so, would cause an IRS audit to determine whether the business and the deductions are justified as a viable business by your records. For specific tax questions that you may have I direct you to ask your tax attorney, tax preparer, or business accountant.

Having completed her Masters in Business Administration, Ma’Shuqa Mira Murjan now divides her time between her career as a university professor of business, her work as a business consultant, and her performing, teaching and continued study of Oriental dance. Currently, Ma’Shuqa is pursuing doctoral studies in Educational Administration in Higher Education, with an emphasis in Curriculum Development and Instruction. www.mashuqa.com