Dear Tax Talk,
I own an S corporation without any employees, 50-50 with my husband. I am active with the corporation full time, while my husband is part time.
Can the S corporation pay for my studies in a trade school (beauty/cosmetology)?
Where can I find the IRS publication(s) addressing this type of corporate expense and its tax implications?
There are two ways that a corporation can make educational benefits available to employees without tax consequence to the employee. Unfortunately, though, I don’t see that they will help you in your situation.
An educational assistance program allows a corporation — including an S corporation — to provide up to $5,250 in educational benefits to its employees. The educational costs are deductible by the employer and excludable from income by the employee.
However, to qualify, no more than 5 percent of the educational assistance costs can benefit shareholders that own directly or indirectly more than 5 percent of the company’s stock. Since you and your husband are the only employees (presumably you take salary from the S corporation) and own all of the stock, you would not be eligible for this exclusion.
The second option allows a corporation, including an S corporation, to pay certain educational expenses for its employees, including shareholders, if the education is in the nature of continuing education. However, no deduction for education expenses will be permitted if the education either is necessary to meet the initial minimum education requirements of a job or trade or business; or qualifies the individual for a new trade or business
Under this rule, the education that allows you to obtain a beautician’s license would not be deductible, since that would be a new trade or business.
You can read more on the subject by looking at IRS Publication 15-B.
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