School On Uncle Sam

Many spa and pool professionals realize that one of the major assets of their businesses is their employees. As is the case with most business assets, the spa and pool operation usually has quite a bit of money invested in hiring and training that worker. A smart businessperson realizes that improving a business asset can reap rewards far exceeding the cost of those improvements. Similarly, workers improve with additional training or education.

The value of training and education is not a recent discovery. Many government plans and programs have long contained provisions permitting them to train or educate new workers. It is a similar story for many small businesses that have taken advantage of a unique tax deduction to pay for the education of their employees.

Naturally, when an employer makes improvements to any business asset — in this case a worker — our tax rules allow a corresponding tax deduction for the expense. In addition to a tax deduction for the employer who is footing the bill to train or educate employees, there's another tax benefit. This one allows the recipient of that educational expense or benefit to ignore it for tax purposes.

EMPLOYER PAYS

U.S. tax law states that payments of up to $5,250 received by an employee for tuition, fees, books, supplies, etc., under an employer's educational assistance program may be excluded from the employee's gross income. Educational assistance also includes employer-led courses for employees.

Let's say Sunshine Pool Service, a hypothetical service company, established an educational plan for all of its regularly employed, full-time employees. In order to receive benefits under this plan, participants were required to submit a written request to the plan administrator before starting the educational course. On completion of the course, the participants were required to provide original receipts of all items for which they sought reimbursement. The participating employee was required to earn a C grade or better in order to receive future benefits.

Our hypothetical business's plan allowed participants to receive reimbursement for courses up to the tax rule's $5,250 limit. This plan also specifically permits employee reimbursement for courses that meet the definition of a working condition fringe benefit — in other words, courses offered by or taken for the benefit of the employer.

The tax law requires an actual plan. However, no actual fund will be established for payment of the benefits — nor can the benefits paid to participants be conditional on their making contributions to the plan. In fact, the business in our example pays the educational benefits out of its general assets.

Under the tax rules, no educational assistance plan or program is permitted to pay more than 5 percent of its benefits to principal (5 percent) shareholders or owners of the spa and pool business. Plus, as required, the business must provide "reasonable" notice concerning the availability and terms of the plan to all eligible employees.

The Internal Revenue Service has approved our hypothetical plan as a qualified educational assistance plan. Therefore, the plan payments for educational expenses are excludable from the gross income of the employee. What's more, the tax rules permit employees to exclude as "working condition fringe benefits" any amounts that are not excludable from their gross income under the basic plan. In addition, all payments made by our hypothetical pool servicing operation — or any business with a similar plan — will be tax deductible as ordinary and necessary business expenses.

ASSISTING EDUCATION

Despite the latitude given businesses, there are restrictions placed on educational assistance plans. Educational assistance, according to our lawmakers, does not include payments for:

• any tools or supplies that an employee gets to keep after completing the course;

• employee meals, lodging or transportation;

• education that involves sports, games or hobbies; or

• graduate-level courses.

An employer who offers an educational assistance plan must maintain records and file an information return (form 5500, "Annual Return/Report of Employee Benefit Plan," with Schedule F, "Fringe Benefit Plan Annual Information Return," attached) for the plan.

THE ALTERNATIVE

Many individuals attempting to foot the bills for their own education can benefit from a tax deduction available to help them reduce their out-of-pocket expenditures. However, unless those education expenditures maintain or improve the skills required by their employment or meet the express requirements of the employer (or applicable law or regulations), imposed as a condition to the retention by the individual of an established employment relationship, status or rate of compensation, no personal deduction may be taken.

Consider the situation of John Doe, for example. John is the selfemployed owner of a spa and pool business. He attends law school at night and after completing his studies receives his law degree. John's expenditures while attending law school are nondeductible personal expenses because this course of study qualifies him for a new trade or business — whether he actually enters that new field or uses his new skills in his present business.

Educational expenses are generally tax deductible by an employee — even an employee of his or her own spa and pool business and even if they lead to a degree — if the education that is undertaken:

1. Maintains or improves a skill required by the individual in the individual's employment or other trade or business, or

2. Meets the express requirements of the individual's employer, or the requirements of law or regulations, imposed as a condition to the retention by the individual of an established employment relationship, status or rate of compensation.

Educational expenses that are personal or which constitute an inseparable aggregate of personal and capital expenditures are not tax deductible, even though they may maintain or improve a skill or may meet the express requirements of the taxpayer's employer.

What our tax rules refer to as nondeductible capital or personal education expenses are those that:

1. Are required of the taxpayer in order to meet the minimum educational requirements for qualification in the taxpayer's present employment, trade or business, or

2. Qualify the taxpayer for a new trade or business.

The minimum education necessary to qualify for a position is determined from a consideration of such factors as requirements of the employer, laws or regulations and the standards of the profession, trade or business involved.

The fact that the taxpayer is already employed does not mean that he or she has met the minimum requirements for qualification in that employment to be entitled to a deduction under the improvement-of-skills test. However, if new education requirements are established after the taxpayer has met the minimum requirements for qualification in his work, the taxpayer is treated as continuing to meet those qualification requirement and expenses incurred in meeting the new requirements are deductible.

A change in duties is not a new trade or business if the new duties involve the same general work as is involved in the taxpayer's present employment. Thus, changing from an elementary to a secondary school teacher or from a teacher in one subject to another does not result in a new trade or business. Also, a change in duties from classroom teacher to principal is not a change in trade or business.

Un-reimbursed expenditures for such items as tuition, books, laboratory fees, dues paid to professional societies, fees paid for professional journals, etc., are deducted by an employee as an itemized deduction, subject to the 2 percent floor on all itemized deductions. The cost of books of relatively permanent value used in connection with professional work is a capital expenditure and must be depreciated.

SCHOLARSHIP OR FELLOWSHIP

It is not unheard of for workers, especially those in skilled positions, to be offered scholarships and fellowships. Naturally, any amount received as a qualified scholarship by an individual who is a candidate for a degree at a qualified educational organization, which normally maintains a regular facility and curriculum and normally has a regularly enrolled body of students in attendance where its educational activities are regularly carried on, is excluded from that individual's gross income.

Under the tax rules, a qualified scholarship includes any amount received by an individual as a scholarship or fellowship grant so long as the amount was used for qualified tuition and related expenses such as fees, books, supplies and equipment required for courses of instruction at a qualified educational organization.

Regardless of who foots the bill for education, the rewards of smarter, better-trained employees are something every spa and pool business can benefit from. Both the business and its employees can help reduce the cost of that education with tax breaks. Education also makes an excellent fringe benefit that every spa and pool operation can employ to attract and retain employees.