How to use tax breaks to reduce employee education costs

Education is an excellent fringe benefit producers can employ to attract and retain employees – and tax breaks can help to reduce the cost.

One of the major assets for all aggregate producers is their employees. As is the case with most business assets, producers usually have quite a bit of money invested in hiring and training workers. Smart producers realize that improving a business asset can reap rewards that far exceed the cost of any improvements made to that asset.

An often-neglected provision of the U.S. tax law permits every aggregate producer to claim a tax deduction for expenditures made to educate or train employees. istock.com.lisafx

When it comes to making smarter workers, everyone benefits thanks in large part to our tax laws. The pit or quarry operation prospers with smarter, better-trained employees – and a tax deduction if they foot the bill for employee education or training costs.

Smarter employees can often avoid a tax bill for the value of education provided by an employer and reap a tax deduction for their own educational expenses. Plus, they are often rewarded with higher pay, promotions or more opportunities. Regardless of whether an employer or the operation’s suppliers provide the education or training, both the worker and the business benefit.

Basic smarts
At its most basic, an aggregate producer who trains a new worker or an existing worker for new duties incurs what our tax laws consider “ordinary and necessary” tax-deductible business expenses. It’s when expenditures are made for training or education by others, or outside the business, that the tax rules kick in.

It really doesn’t matter if an aggregate producer is self-employed, an employee of his or her own pit and quarry business, or simply an employee. Tax deductions and unique write-offs abound for anyone willing to look for them – or seek direction from an expert. In fact, under our tax rules many educational and training expenses incurred by a business are both tax deductible by the business and, at the same time, tax-free to the recipients.

An aggregate producer may deduct the cost of “ordinary and necessary” expenses paid for employee education and training. Producers may also deduct the cost of education for the business owners if it can show that the education or training “maintains or improves skills required in the trade or business,” or that the education is required by law or regulations for maintaining a license to practice, status or job. For example, professionals in many fields routinely deduct costs for continuing education.

Of course, expenses incurred in meeting the minimum requirements of an individual’s present trade or business, or those that qualify them for a new trade or business, are not deductible. This is true even if the education maintains or improves skills presently required in the present employment.

The employer pays
An often-neglected provision of our tax law permits every aggregate producer to claim a tax deduction for expenditures made to educate or train employees. This is an ideal fringe benefit for any employee – even employee/owners of their own quarry or aggregate business. And, best of all, it is deductible by the business and tax-free to the recipient.

In general, an employer with an educational assistance plan can deduct up to $5,250 of educational assistance provided to an employee each year. Without an educational assistance plan, or if educational assistance exceeds the $5,250 threshold, the amounts qualify as a tax deduction if they are so-called working condition benefits. A working condition benefit is a service or property that would have been deductible as a personal business expense if an employee paid for it.

An educational assistance program is a separate written plan that provides educational assistance only to an aggregate operation’s employees. These expenses usually include the cost of books, equipment, fees, supplies and tuition. The cost of a course or other education involving sports, games or hobbies, is usually not included unless required as part of a degree program, or unless it has a reasonable relationship to the business.

Although the tax law requires an actual “plan,” the rules do not require an employer to fund the plan’s educational benefits. In fact, most businesses with a plan pay the educational benefits out of the operation’s general assets. Naturally, the benefits paid to participants cannot be conditional on them making contributions to the plan.

No educational assistance plan or program is permitted to pay more than 5 percent of its benefits to principal shareholders or to an employee who received more than $110,000 in pay for the preceding year – unless the employee was not also in the top 20 percent of employees. Plus, the business must provide reasonable notice concerning the availability and terms of the plan to all eligible employees.
Assisting education

With an IRS-approved educational plan, payments for educational expenses, even for graduate-level courses, are excludable from the gross income of the employee. What’s more, employees may be able to exclude as “working condition fringe benefits” any amounts that are not excludable under the basic plan. In addition, all payments made by a pit and quarry operation – or any business with a similar plan – are tax deductible as ordinary and necessary business expenses.

Despite the latitude given to aggregate producers and other businesses, there are restrictions placed on educational assistance plans. Educational assistance, to our lawmakers, does not include payments for tools or supplies that an employee gets to keep after completing the course or employee meals, lodging or transportation.

Worker basics
An employee itemizing his or her personal deductions can claim a deduction for the expenses paid for work-related education. The deduction is the amount by which qualifying work-related education expenses, plus other job and certain miscellaneous expenses, is greater than 2 percent of the employee’s adjusted gross income. An itemized deduction reduces the amount of income subject to tax.

For the self-employed, 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.

Work-related education expenses may also qualify for additional tax benefits, such as a tax deduction for tuition and fees and the American opportunity and lifetime learning credits.

Work-related education
An employee can often deduct the cost of qualifying work-related education as personal expenses. This is education that meets at least one of the following two tests:

1. Education required by an employer or by law in order to keep present salary, status or job. Of course, the required education must serve a bona fide business purpose for the employer.
2. Education that maintains or improves skills needed in the individual’s present work.

However, even if the education meets one or both of the above tests, it is not qualifying work-related education if it is needed to meet the minimum educational requirements in the individual’s present trade or business, or if it is part of a program of study that will qualify for a new trade or business.

Even better, an individual can deduct the costs of qualifying work-related education as a personal business expense even if the education could lead to a degree.

The fact that an individual is already employed does not mean the minimum requirements for qualification in that employment have been met. If new education requirements are established after an individual has met the minimum requirements, that individual will be treated as continuing to meet those qualification requirements. In other words, expenses incurred in meeting the new requirements will be tax deductible.

It should also be kept in mind that a change in duties is not a “new trade or business” if the new duties involve the same general work as that involved in the present employment. Thus, changing from driving a wheel loader to a tracked loader or from a mine manager to a plant superintendent does not result in a new trade or business. Also, a change in duties is not a change in trade or business.

Education pays
Training and education are important for every quarry and aggregate business in order to ensure the success and continued profitability of the operation. Those training and educational expenses, whether paid for by the producer, by a supplier or an equipment distributor, subsidized or sponsored by an industry group or association, can be considered fringe benefits because they are, for the most part, tax-free to the recipient.

Owners, producers and employees can enjoy an offsetting tax deduction for educational expenses that are not covered by the employer or business. Thus, everybody profits – especially the business that benefits from smarter, better-educated or trained employees. The aggregate producer can, of course, claim a tax deduction for educational expenses, all while providing the operation’s employees with a valuable, tax-free fringe benefit.

Regardless of who foots the bill for education, the rewards of smarter, better-trained employees are something every aggregate producer can reap. Quarry and aggregate businesses, as well as their employees, can help to reduce the cost of that education with tax breaks. Education also makes an excellent fringe benefit every pit and quarry operation can employ to attract and retain employees.

Take note
For the self-employed, expenses for qualifying work-related education are deducted directly from self-employment income.

Mark E. Battersby is a freelance writer who has specialized in taxes and finance for the past 25 years.