How to deduct training expenses that were necessary to establish a business?

Question

I went through some training courses to obtain some certifications that I needed to run a business. The next year, I established a single-member LLC and started doing business using those certifications.

I would like to deduct the costs of those trainings/certifications from my tax returns, but I'm not sure how to do that.

I was initially thinking of reporting those expenses as startup-expenditures, which seems to be allowed under section 195. However, somebody told me that educational expenses necessary to establish a business cannot be deducted as startup costs, and they pointed pointed me to Topic no. 513, Work-related education expenses, which says:

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 present trade or business

People in my same line of business of me said that what they did was using depreciation to "spread" the costs of the trainings/certifications across 5 years. I read Instructions for Form 4562 (2023) and "Part VI. Amortization" seems to be what applies to me. Specifically, Part VI says that I can amortize "Business startup costs (section 195)". What confuses me is that I was told by some people that section 195 does not apply to my case, because they are work-related education expenses, but other people are telling me that I should go that route with depreciation/amortization. I also don't understand why I cannot report these expenses in 1 tax filing, but I should spread it over 5.

Can somebody help clear up my confusion? What would be the best way to report my training/certification costs in my tax returns?

Answer 1

You cannot deduct these expenses.

The IRC Sec. 162 allows for deduction of:

all the ordinary and necessary expenses paid or incurred during the taxable year in carrying on any trade or business

But your education expenses were not incurred in carrying any trade or business. They allowed you to open a new business, true, but you weren't carrying on it when you were studying. In your case, the education expenses and the business weren't even in the same year.

Generally, continued education needed to maintain existing license or certification is an ordinary and necessary expense to work in the business that requires that license or certification.

But, acquiring a new license or certification with intent to, later, open a business that requires it - is not deductible to that future business, because it didn't exist yet when you incurred the expense. So you could not have possibly incurred it while in currying on it.

The IRC Sec. 195 allows for amortization of start up expenses. Start up expenses are expenses related to starting the business up - the cost of drafting the operational agreements, by-laws, due-diligence costs before taking over someone else's business, or expenses incurred for the business before it was properly organized (See IRC Sec. 195(c)). None of that could have happened in your case before you got your certification, since you said it's required for having that business to begin with. In any case, education is not any of those things. What you can deduct under Sec. 195 (and cannot under Sec. 162) is the costs related to the LLC organization and registration.

People can say all they want, and you'd be surprised how many people cheat on their taxes. But, if you're asking whether you can legally deduct this - no, you cannot.