Tax Memo

Tax Research Memorandum

To: Benjamin Jones

From: Andrew, CPA Date: March 24, 2013 Re: Facts You are a new staff accountant for Local Firms CPAs, LLC. Your firm expects you to take and pass the CPA exam. To prepare for the exam, you take a CPA exam review course. The review course costs $2,500 and your firm will not reimburse you for the expense. You want to report the review course cost as a tax deduction on your federal income tax return for the year. Issue The issue is whether the CPA exam review course cost may be deducted from your federal income tax return for the year. Authority - 26 CFR 1.162-5 Rule Work related education may be deducted as business expenses if it meets at least one of two tests listed below. 1. The education is required by your employer or the law to keep your present salary, status, or job. The required education must serve a bona fide business purpose of your employer. 2. The education maintains or improves skills needed in your present work. On the other hand, even though the education qualifies as a work related, it may be disqualified if it fulfills one of the two criteria listed below. 1. The education is needed to meet the minimum requirements of your present trade or business. 2. The education will qualify you for a new trade or business. Tax Deduction of CPA Review Course Cost

Analysis The CPA review course meets the qualifications to be considered a work related business expense because it improves skills needed in your present work and it is a cost associated with an education that your employer expects you to obtain. However, per 26 CFR 1.162-5(3), expenditures made for education which is part of a program of study that will lead to qualifying for a new trade or business will be categorized as a nondeductible educational expense. Since passing the CPA exam will allow you to be licensed for a new trade or business, any costs associated with the passing of the exam, such as the review course is deemed as a nondeductible...