The IRS has updated its practice unit discussing examining education expenses claimed by nonresident alien individual employees. The overview is as follows:
This unit focuses on examining the education expenses claimed by nonresident alien individuals (NRAs) engaged in a U.S. trade or business (USTB) as employees and will discuss the issues and audit steps that the examiners will need to consider for these taxpayers.
NRAs come to the U.S. for a number of reasons on various nonimmigrant visas each year. They can range from professionals, students, apprentices, researchers, trainees, professors, scholars, teachers and others. In order for an NRA to be able to deduct business expenses, he or she must be engaged in USTB and have income effectively connected with a USTB that is not otherwise exempt, such as income exempt by a tax treaty. Examiners will need to verify that the NRA is engaged in a USTB (e.g., his or her employment status) and has effectively connected income (ECI) that is not exempt. If an NRA is self-employed, he or she may deduct the qualifying work-related education expenses directly from his or her self-employment income on Schedule C, Profit or Loss From Business (Sole Proprietorship). For tax years beginning before 2018 and after 2025, if the NRA has ECI and is considered an employee, he or she may claim any allowable education expenses on his or her Form 1040NR, U.S. Nonresident Alien Income Tax Return, or 1040NR-EZ, U.S. Income Tax Return for Certain Nonresident Aliens With No Dependents, as a miscellaneous itemized deduction subject to a 2% adjusted gross income limitation on Schedule A, Itemized Deductions. This unit will focus on NRAs claiming employee education expense deductions. Therefore, this unit will not address NRAs who are self-employed or who are deemed to be in a USTB under IRC 871(c), Participants in Certain Exchange or Training Programs.
Examiners also need to analyze the claimed expenses and determine whether the taxpayer claimed any nondeductible personal, living, or family expenses. Finally, examiners need to apply objective tests for determining whether or not the education expenses claimed are deductible under Treas. Reg.1.162-5, Expenses for education. Expenses will be disallowed if (1) the education meets the minimal educational requirements of the taxpayer’s trade or business, or (2) the education qualifies the taxpayer for a new trade or business. Furthermore, the expenses are only allowed if (1) the expenses were used for education that maintains or improves his or her job skills required in his or her trade or business as an employee, or (2) the education is required as a condition of employment by the employer or by law. These rules apply to NRAs in the same manner as they apply to U.S. citizens and resident aliens.
Posted by Jessica Ji, Associate Editor, Wealth Strategies Journal.