How physicians can make smarter education deductions

Most physicians are familiar with the necessity of Continuing Medical Education (CPE), although many ignore the impact of education on the medical practice’s employees -- one of the major assets of any practice. Fortunately, the cost of continuing education, as well as training and educating the practice’s employees can often be reduced by our tax laws.

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When it comes to smarter workers, everyone benefits. The practice prospers with smarter, better-trained employees -– and a tax deduction if the practice foots the bill for employee education or training costs. Those smarter employees, along with the practice’s principal(s), can reap tax deductions for the education costs they personaly pay for.

While expenses incurred to meet the minimum requirements of anyone’s present professional status or to qualify them for new professions, trades, or businesses are not deductible, education that helps a physician meet the requirements for maintenance of licensure, maintenance of specialty board certification, credentialing, membership in professional societies, and other professional privileges, are usually tax deductible.

For employers, the amount paid or reimbursed for an employee’s education expenses is a deductible business expense. As an added bonus, if the educational expenses qualify, the recipient may be able to exclude the payment or reimbursement from gross income as a “working condition fringe benefit.”

Educational assistance programs allow employers to provide employees with educational assistance of up to $5,250 annually that can be excluded from the employee’s income. Employers claim a business deduction for educational employee benefits paid and are not required to pay FICA or FUTA payroll taxes for benefits provided under the program.

Although the plan does not have to be funded, only payments or reimbursements made from a formal plan can be excluded by the recipient. If the payment or reimbursement isn’t made under such a plan, the recipient may still be able to claim job-related educational expenses as a miscellaneous itemized deduction. Of course, the reimbursement or payment is not excluded from the recipient’s income and is considered compensation subject to withholding and payroll taxes.

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No educational assistance plan can discriminate in favor of employees who are principals, officers, or highly compensated employees, nor their spouses or dependents. The nondiscrimination requirement does not mean that educational assistance must be offered to all of a medical practice’s employees since an employer is free to cover only certain classes of employees.

For a self-employed physician, expenses for qualifying, work-related education are deducted directly from self-employment income. This reduces the amount of income subject to both income tax and self-employment tax.

An employee, even a principal/employee, itemizing his or her deductions can usually claim a deduction for the expense of work-related education. The deduction is the amount by which the qualifying work-related education expenses plus other job and certain miscellaneous expenses (except for the impairment-related work expenses of disabled individuals) is greater than two percent of the individual’s adjusted gross income (AGI). An itemized deduction reduces the amount of income subject to tax.

According to the Accreditation Council for Continuing Medical Education (ACCME), a nonprofit corporation based in Chicago, nearly 1,900 organizations offer CME activities that result in nearly 26 million interactions with health professional participants annually. However, only one organization, the Internal Revenue Service, offers a solution for the cost of that CME or other education, a solution that may require the assistance of a qualified tax professional.