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What is a "New Trade or Business" for Purposes of Tax Law

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  • 12-03-2017, 09:18 AM
    ransomedbyfire
    What is a "New Trade or Business" for Purposes of Tax Law
    I could've sworn I'd already asked a similar question here, but I can't find it. And now I have, I believe, a more precise set of questions about it.

    Topic Number: 513 - Work-Related Education Expenses says:

    You may be able to deduct work-related education expenses paid during the year as an itemized deduction on Form 1040, Schedule A (PDF), Itemized Deductions. To be deductible, your expenses must be for education that (1) maintains or improves your job skills or (2) that your employer or a law requires to keep your salary, status, or job. However, even if the education meets either of these tests, the education can't be part of a program that will qualify you for a new trade or business or that you need to meet the minimal educational requirements of your trade or business.

    What exactly, according to the IRS defines a "new trade or business"?

    Just how broadly does the IRS see this?

    As a software developer who only currently uses Visual Basic, would it be a new trade if I learned another language like C? I mean, sure, it could qualify me for more jobs, but is it a new trade or business?

    Considering I'm self-taught and some corporations might not be willing to hire me right now, would taking a course that made it so that they would hire me (but with a very similar job title) disqualify me for writing an education expense off? Does that mean I need it to meet the minimal educational requirements of my trade or business and thus can't write it off?

    Where is the line?
  • 12-03-2017, 09:46 AM
    flyingron
    Re: What Exactly, According to the IRS Defines a "New Trade or Business"
    Switching computer languages isn't a new trade. That would be an extension of your existing business that you were qualified for. It's exactly the type of thing that the deduction is designed to cover. Now if you went to take flying lessons with the goal of becoming a pilot rather than a programmer, that would be a new trade/business.

    Do you have enough self-employment income or itemized deductions that this will actually make any difference?

    By the way, as a person who has spent 40 years in the software industry, if you are on the .NET versions of VB, I'd suggest learning C# on yoru own. It's an easy switch from VB.NET. From there you can start taking class in C or C++ and other API skill sets.

    Good luck.
  • 12-03-2017, 10:20 AM
    Taxing Matters
    Re: What Exactly, According to the IRS Defines a "New Trade or Business"
    Quote:

    Quoting ransomedbyfire
    View Post

    What exactly, according to the IRS defines a "new trade or business"?

    Just how broadly does the IRS see this?

    I agree with flyingron that a computer programmer learning a new computer programming language is not education that would qualify you for a new trade or business. But as you asked exactly how the IRS defines it, I’ll answer that question. The applicable Treasury regulation on this states:

    (3) Qualification for new trade or business. (i) The second category of nondeductible educational expenses within the scope of subparagraph (1) of this paragraph are expenditures made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business. In the case of an employee, a change of duties does not constitute a new trade or business if the new duties involve the same general type of work as is involved in the individual's present employment. For this purpose, all teaching and related duties shall be considered to involve the same general type of work. The following are examples of changes in duties which do not constitute new trades or businesses:
    (a) Elementary to secondary school classroom teacher.
    (b) Classroom teacher in one subject (such as mathematics) to classroom teacher in another subject (such as science).
    (c) Classroom teacher to guidance counselor.
    (d) Classroom teacher to principal.

    (ii) The application of this subparagraph to individuals other than teachers may be illustrated by the following examples:

    Example 1. A, a self-employed individual practicing a profession other than law, for example, engineering, accounting, etc., attends law school at night and after completing his law school studies receives a bachelor of laws degree. The expenditures made by A in attending law school are nondeductible because this course of study qualifies him for a new trade or business.

    Example 2. Assume the same facts as in example (1) except that A has the status of an employee rather than a self-employed individual, and that his employer requires him to obtain a bachelor of laws degree. A intends to continue practicing his nonlegal profession as an employee of such employer. Nevertheless, the expenditures made by A in attending law school are not deductible since this course of study qualifies him for a new trade or business.

    Example 3. B, a general practitioner of medicine, takes a 2–week course reviewing new developments in several specialized fields of medicine. B's expenses for the course are deductible because the course maintains or improves skills required by him in his trade or business and does not qualify him for a new trade or business.

    Example 4. C, while engaged in the private practice of psychiatry, undertakes a program of study and training at an accredited psychoanalytic institute which will lead to qualifying him to practice psychoanalysis. C's expenditures for such study and training are deductible because the study and training maintains or improves skills required by him in his trade or business and does not qualify him for a new trade or business.

    Treas. Reg. § 1.162-5(b)(3). A good summary of the rule is provided by the U.S. Tax Court, which explains:

    Education expenses, however, are not deductible if they are “made by an individual for education which is part of a program of study being pursued by him which will lead to qualifying him in a new trade or business.” Sec. 1.162–5(b)(3)(i), Income Tax Regs. This is so even if the courses meet the express requirements of the employer. Jungreis v. Commissioner, 55 T.C. 581, 591, 1970 WL 2256 (1970). It is immaterial whether the individual undertaking the education intends to or does in fact become employed in a new trade or business. Bodley v. Commissioner, 56 T.C. 1357, 1360, 1971 WL 2538 (1971).

    Whether the education qualifies a taxpayer for a new trade or business depends upon the tasks and activities which he was qualified to perform before the education and those which he is qualified to perform afterwards. Weiszmann v. Commissioner, 52 T .C. 1106, 1110, 1969 WL 1739 (1969), affd. per curiam 443 F.2d 29 (9th Cir.1971). We have repeatedly disallowed education expenses where the education qualifies the taxpayer to perform significantly different tasks and activities. Browne v. Commissioner, 73 T.C. 723, 726, 1980 WL 4566 (1980); Glenn v. Commissioner, 62 T.C. 270, 275, 1974 WL 2620 (1974). Further, the taxpayer's subjective purpose in pursuing the education is irrelevant, and the question of deductibility is not satisfied by a showing that the taxpayer did not in fact carry on or did not intend to carry on a new trade or business. Burnstein v. Commissioner, 66 T.C. 492, 495, 1976 WL 3650 (1976).

    Warren v. Commissioner, 85 T.C. Memo. 1494 (2003).
  • 12-03-2017, 07:43 PM
    ransomedbyfire
    Re: What Exactly, According to the IRS Defines a "New Trade or Business"
    Quote:

    Quoting Taxing Matters
    View Post
    But as you asked exactly how the IRS defines it, I’ll answer that question.

    Thanks. This is exactly what I was looking for.

    Quote:

    Quoting flyingron
    View Post
    Do you have enough self-employment income or itemized deductions that this will actually make any difference?

    I am hoping to include it as an expense on my Schedule C.

    Quote:

    By the way, as a person who has spent 40 years in the software industry, if you are on the .NET versions of VB, I'd suggest learning C# on yoru own. It's an easy switch from VB.NET. From there you can start taking class in C or C++ and other API skill sets.
    I've actually taken half of a free Harvard course on C online. But life happened, and I never finished it. It used Linux and gedit, I think?

    I'm looking to spend about $2,500 and improve my skills. In part, I need to reduce my business income. But spending it on education would probably help me a great deal too. So, why not?

    So far, two things that come to mind that seem fairly quick but not cheap (which is what I'm looking for) are learning Amazon Web Services or Tradestation's EasyLanguage. And I could finish learning C on my own for free.
  • 12-04-2017, 07:42 AM
    flyingron
    Re: What Exactly, According to the IRS Defines a "New Trade or Business"
    As far as your Tax issues are concerned, yes you can take it off your sched C programming-based income.

    I have been programming in C since 1977. My college was one of the early users of UNIX. Most of my career was C and then C++ (with random forays into C# and VB and other languages).
    Your first step would be the classic Kernighan and Ritchie book "The C Programming Language." There are some good courses on Lynda.com (free).
  • 12-04-2017, 06:55 PM
    ransomedbyfire
    Re: What Exactly, According to the IRS Defines a "New Trade or Business"
    Quote:

    Quoting flyingron
    View Post
    As far as your Tax issues are concerned, yes you can take it off your sched C programming-based income.

    I have been programming in C since 1977. My college was one of the early users of UNIX. Most of my career was C and then C++ (with random forays into C# and VB and other languages).
    Your first step would be the classic Kernighan and Ritchie book "The C Programming Language." There are some good courses on Lynda.com (free).

    Thanks!
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