Step 3 Tax Deductible?

[samac]

All I can find is a 10 year old thread where it says it isn’t tax deductible, but I can’t find the most recent info. Some residency programs don’t pay for step 3 and I was wondering if it could written off on taxes as an expense? What about any study materials/books/things we may need for residency?

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[NotAProgDirector]

I believe the trump tax overhaul removed the unreimbursed work expense deduction. In any case you’d need to both exceed the standard deduction and have expenses above the 2% AGI floor

And theoretically your initial work license fees were not deductible. But now none of it is

 

[BoardingDoc]

All I can find is a 10 year old thread where it says it isn’t tax deductible, but I can’t find the most recent info. Some residency programs don’t pay for step 3 and I was wondering if it could written off on taxes as an expense? What about any study materials/books/things we may need for residency?

From the IRS website:
Changes to the deduction for un-reimbursed employee expenses
The Tax Cuts and Jobs Act also suspends all miscellaneous itemized deductions that are subject to the 2 percent of adjusted gross income floor. This change affects un-reimbursed employee expenses such as uniforms, union dues and the deduction for business-related meals, entertainment and travel.

Thus, the business standard mileage rate listed in Notice 2018-03 (PDF), which was issued before the Tax Cuts and Jobs Act passed, cannot be used to claim an itemized deduction for un-reimbursed employee travel expenses in taxable years beginning after Dec. 31, 2017, and before Jan. 1, 2026. The IRS issued revised guidance today in Notice 2018-42 (PDF).

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That said, it is extremely unlikely that you have > $12k in eligible individual deductions as a resident, in which case you would be taking the standard deduction anyway.

 

[Piebaldi]

I believe the trump tax overhaul removed the unreimbursed work expense deduction. In any case you’d need to both exceed the standard deduction and have expenses above the 2% AGI floor

And theoretically your initial work license fees were not deductible. But now none of it is

This - our tax accountant said this indeed - step 3, licensing, board costs/prep courses, etc - none of them are tax deductible anymore.

 

[samac]

This - our tax accountant said this indeed - step 3, licensing, board costs/prep courses, etc - none of them are tax deductible anymore.

Balls.
Thanks guys for the info!

 

[RangerBob]

Might be deductible as a business expense if you have any 1099 income (ie. moonlighting). But even then it might not since its to get your initial license.

 

[Piebaldi]

Balls.
Thanks guys for the info!

Now if you get an LLC of some sort - you can deduct up to 24k in taxes for "business meetings" to be held for your LLC. Cheers!

 

[Raryn]

Might be deductible as a business expense if you have any 1099 income (ie. moonlighting). But even then it might not since its to get your initial license.

Came here to say the same thing.

If you take Step 3 in the same calendar year you have moonlighting income, you should be able to deduct it as an unreimbursed Schedule C business expense. That would pass audit just fine.

 

[Obnoxious Dad]

Came here to say the same thing.

If you take Step 3 in the same calendar year you have moonlighting income, you should be able to deduct it as an unreimbursed Schedule C business expense. That would pass audit just fine.

CPA here. I think you're wrong. Expenses incurred to start a career such as Step 3 and an initial medical license are not deductible. With most tax software it would be easy to jam those dollars into "other expenses" on a Schedule C but I don't think it would hold up in the event of an audit. On the other hand, if you move to another state or simply incur CME and other board expenses after you have begun to earn income, those should be deductible on Schedule C. Finally, if you moonlight as a Schedule C but have a w2 job, you need to allocate joint expenses between the two based on the share of income from each.

 

[Piebaldi]

CPA here. I think you're wrong. Expenses incurred to start a career such as Step 3 and an initial medical license are not deductible. With most tax software it would be easy to jam those dollars into "other expenses" on a Schedule C but I don't think it would hold up in the event of an audit. On the other hand, if you move to another state or simply incur CME and other board expenses after you have begun to earn income, those should be deductible on Schedule C. Finally, if you moonlight as a Schedule C but have a w2 job, you need to allocate joint expenses between the two based on the share of income from each.

I don't believe that your statement about "moving to another state and incurring CME or board expenses after beginning to earn income" is incorrect at least according to our CPA.

 

[Raryn]

CPA here. I think you're wrong. Expenses incurred to start a career such as Step 3 and an initial medical license are not deductible. With most tax software it would be easy to jam those dollars into "other expenses" on a Schedule C but I don't think it would hold up in the event of an audit. On the other hand, if you move to another state or simply incur CME and other board expenses after you have begun to earn income, those should be deductible on Schedule C. Finally, if you moonlight as a Schedule C but have a w2 job, you need to allocate joint expenses between the two based on the share of income from each.

I am not a CPA, but I disagree personally. Step 3 is a necessary expense for you to start up your independent contracting business doing hospitalist shifts (or whatever). I deducted my licensing expenses and all unreimbursed CME against my fellowship moonlighting income and would do it again anyday.

Also, the allocating expenses by % income is only true by default, unless you have an explicit argument where you can allot differently. Say, for example, you were not required to have a license for your W-2 job (due to it being perfectly acceptable to be a resident on a training license) but you had to have it for your 1099 job (due to it being a condition of being able to work) - if you can justify that, you can hold up deducting the full amount against your schedule C.

CPAs vary considerably based on how conservative they are regarding schedule C deductions but none of the above is fraud - and it is perfectly reasonable to be on the aggressive side. As long as you aren't doing dumb things like deducting normal commutes or 100% of all cell phone expenses and such.

 

[Piebaldi]

I am not a CPA, but I disagree personally. Step 3 is a necessary expense for you to start up your independent contracting business doing hospitalist shifts (or whatever). I deducted my licensing expenses and all unreimbursed CME against my fellowship moonlighting income and would do it again anyday.

Also, the allocating expenses by % income is only true by default, unless you have an explicit argument where you can allot differently. Say, for example, you were not required to have a license for your W-2 job (due to it being perfectly acceptable to be a resident on a training license) but you had to have it for your 1099 job (due to it being a condition of being able to work) - if you can justify that, you can hold up deducting the full amount against your schedule C.

CPAs vary considerably based on how conservative they are regarding schedule C deductions but none of the above is fraud - and it is perfectly reasonable to be on the aggressive side. As long as you aren't doing dumb things like deducting normal commutes or 100% of all cell phone expenses and such.

So you are referring exclusively to moonlighting? Because I have been told repeatedly that Step 3, board exam fees, licending fees, CMEs, etc are not tax deductible.

 

[Raryn]

So you are referring exclusively to moonlighting? Because I have been told repeatedly that Step 3, board exam fees, licending fees, CMEs, etc are not tax deductible.

Since 2017, they are not tax deductible against W2 income, which is how you're paid by your residency program. No unreimbursed expenses are deductible against W2 income.

They are deductible against *business* income if they relate to your business, which functionally means the only way you can deduct them is if you moonlight as a physician contractor and receive a 1099 for that income.

Basically, contractors have a *lot* more flexibility with their tax deductions than employees. In exchange for having to pay both halves of FICA as well as their own benefits, they can deduct anything even remotely necessary to their function as physicians. Some things have limits (you can only deduct driving within the workday if you're going hospital->clinic and such - the commute to and from work doesn't count) but they're far and away more than you can deduct as an employee.

 

[Obnoxious Dad]

I am not a CPA, but I disagree personally. Step 3 is a necessary expense for you to start up your independent contracting business doing hospitalist shifts (or whatever). I deducted my licensing expenses and all unreimbursed CME against my fellowship moonlighting income and would do it again anyday.

Also, the allocating expenses by % income is only true by default, unless you have an explicit argument where you can allot differently. Say, for example, you were not required to have a license for your W-2 job (due to it being perfectly acceptable to be a resident on a training license) but you had to have it for your 1099 job (due to it being a condition of being able to work) - if you can justify that, you can hold up deducting the full amount against your schedule C.

CPAs vary considerably based on how conservative they are regarding schedule C deductions but none of the above is fraud - and it is perfectly reasonable to be on the aggressive side. As long as you aren't doing dumb things like deducting normal commutes or 100% of all cell phone expenses and such.

Sorry. You are wrong about an initial license. Next time go to a professional.

"Initial Fees and Renewals
License renewal fees are generally deductible if the fee is for professional or business purposes, but accreditation fees are not deductible. The Internal Revenue Service reports that any professional license fees you initially pay are not deductible. For example, if you are an accountant and pay an initial fee for the right to practice accounting, these fees are not deductible. However, you can deduct later renewal fees for the same license."

https://www.sapling.com/12012529/license-renewal-count-deductible-taxes

CPA's vary considerably based on their knowledge base and their level of integrity. You can find incompetency and dishonesty imn any field of endeavor. Any field.

 

[BoardingDoc]

Sorry. You are wrong about an initial license. Next time go to a professional.

"Initial Fees and Renewals
License renewal fees are generally deductible if the fee is for professional or business purposes, but accreditation fees are not deductible. The Internal Revenue Service reports that any professional license fees you initially pay are not deductible. For example, if you are an accountant and pay an initial fee for the right to practice accounting, these fees are not deductible. However, you can deduct later renewal fees for the same license."

https://www.sapling.com/12012529/license-renewal-count-deductible-taxes

CPA's vary considerably based on their knowledge base and their level of integrity. You can find incompetency and dishonesty imn any field of endeavor. Any field.

From the IRS itself instead of whatever sapling is: https://www.irs.gov/pub/irs-pdf/p529.pdf
Page 6.

I enjoy how the IRS points out on the same page that "illegal bribes and kickbacks" are also non-deductible.

 

[Obnoxious Dad]

From the IRS itself instead of whatever sapling is: https://www.irs.gov/pub/irs-pdf/p529.pdf
Page 6.

I enjoy how the IRS points out on the same page that "illegal bribes and kickbacks" are also non-deductible.

Good catch although the initial license fee hee haw is on page 8.

 

[BoardingDoc]

Good catch although the initial license fee hee haw is on page 8.

Didn't even go down that far. I was just looking at the long list of all of the items on page 6.

 

[Raryn]

Sorry. You are wrong about an initial license. Next time go to a professional.

"Initial Fees and Renewals
License renewal fees are generally deductible if the fee is for professional or business purposes, but accreditation fees are not deductible. The Internal Revenue Service reports that any professional license fees you initially pay are not deductible. For example, if you are an accountant and pay an initial fee for the right to practice accounting, these fees are not deductible. However, you can deduct later renewal fees for the same license."

https://www.sapling.com/12012529/license-renewal-count-deductible-taxes

CPA's vary considerably based on their knowledge base and their level of integrity. You can find incompetency and dishonesty imn any field of endeavor. Any field.

You are correct, my foot is in my mouth for that one. If my taxes from that year get audited, it looks like I'm going to potentially be out a couple hundred bucks (though in my particular case it was getting a *second* state license, so maybe that won't count as initial - regardless, I'm not going to go back and addend that return).

I'll take back what I said about licensure fees.

 

[Obnoxious Dad]

You are correct, my foot is in my mouth for that one. If my taxes from that year get audited, it looks like I'm going to potentially be out a couple hundred bucks (though in my particular case it was getting a *second* state license, so maybe that won't count as initial - regardless, I'm not going to go back and addend that return).

I'll take back what I said about licensure fees.

If you got a second state license (e.g. you had one in Minnesota and wanted to practice in Iowa as well) it would be OK to deduct the cost of acquiring the Iowa license because you were already working as a physician in Minnesota. The bugaboo is trying to deduct expenses for a new career e.g. a first medical license.

This used to come up all of the time with people who worked in one field, say accounting, and went to law school at night. In every business field, whether it's accounting, personnel, marketing or finance, a law degree can be a very handy tool. The IRS and the courts, however, are of the opinion that if you are going to law school, you are doing it to become a lawyer and law school tuition is, therefore, not deductible. This is in spite of the fact that 30 to 40% of the people who start out as first year law students will never practice law.

 

[dpmd]

If you got a second state license (e.g. you had one in Minnesota and wanted to practice in Iowa as well) it would be OK to deduct the cost of acquiring the Iowa license because you were already working as a physician in Minnesota. The bugaboo is trying to deduct expenses for a new career e.g. a first medical license.

This used to come up all of the time with people who worked in one field, say accounting, and went to law school at night. In every business field, whether it's accounting, personnel, marketing or finance, a law degree can be a very handy tool. The IRS and the courts, however, are of the opinion that if you are going to law school, you are doing it to become a lawyer and law school tuition is, therefore, not deductible. This is in spite of the fact that 30 to 40% of the people who start out as first year law students will never practice law.

Step 3 is a grey area because it isn't required to get a training license so you could claim it isn't for starting that career, but I am willing to bet in an audit it will come down to if you can convince the auditor or not.

 

[NotAProgDirector]

This is totally outside my wheelhouse, so I could be totally incorrect. However, I think there (might?) be two different issues at play here. The first question (and pub 529) relates to whether the cost of a medical license can be deducted on Sched A as an unreimbursed business expense. That answer is clearly no for your first license, theoretically yes for renewal however it no longer exists at all, and used to be subject to the 2% floor which made it practically impossible for most to claim anyway.

But, my understanding from the question is whether you can deduct the cost of the license from moonlighting income. In that case, you're receiving a 1099 as an independent contractor. Assuming that you decide to file Sched C as a small business, then the question is whether that counts as a qualified business expense on Sched C, which (I think?) is covered by pub 535: https://www.irs.gov/pub/irs-pdf/p535.pdf

I think (maybe?) that a medical license would qualify as a section 197 intangible asset (page 30 of the PDF) -- they mention as examples the cost of a liquor license or a taxi medallion. Seems very similar to me. Problem is, you need to amortize it over 15 years (which seems crazy, since the license is usually only good for 3-5 years, so seems you should amortize it over that period of time).

In any case, if you have to amortize it over a long period of time, it may simply not be worth it.

Any and all of this could be wrong. The only thing that I'm almost certain of is that if you're filing Sched C, get professional help. And by "professional help", I mean "not me".

 

[Piebaldi]

This is totally outside my wheelhouse, so I could be totally incorrect. However, I think there (might?) be two different issues at play here. The first question (and pub 529) relates to whether the cost of a medical license can be deducted on Sched A as an unreimbursed business expense. That answer is clearly no for your first license, theoretically yes for renewal however it no longer exists at all, and used to be subject to the 2% floor which made it practically impossible for most to claim anyway.

But, my understanding from the question is whether you can deduct the cost of the license from moonlighting income. In that case, you're receiving a 1099 as an independent contractor. Assuming that you decide to file Sched C as a small business, then the question is whether that counts as a qualified business expense on Sched C, which (I think?) is covered by pub 535: https://www.irs.gov/pub/irs-pdf/p535.pdf

I think (maybe?) that a medical license would qualify as a section 197 intangible asset (page 30 of the PDF) -- they mention as examples the cost of a liquor license or a taxi medallion. Seems very similar to me. Problem is, you need to amortize it over 15 years (which seems crazy, since the license is usually only good for 3-5 years, so seems you should amortize it over that period of time).

In any case, if you have to amortize it over a long period of time, it may simply not be worth it.

Any and all of this could be wrong. The only thing that I'm almost certain of is that if you're filing Sched C, get professional help. And by "professional help", I mean "not me".

I'm no accountant but have a reasonably knowledgeable one, but what you stated above regarding the 2% floor for income is very true and what ive been told - even as residents if we have a working spouse, we are likely not to be able to meet that requirement since the 2% income floor is wayyy exceed- and if just exclusively for moonlighting i am not sure that would fly given that moonlighting is not a business and you do not create an LLC entity to moonlight.
Even if independent contractor I doubt it would qualify? Additionally if moonlighting internally - ie in one's program with a training license, this falls even more short since no additional licensing might be needed.

 

[dpmd]

I'm no accountant but have a reasonably knowledgeable one, but what you stated above regarding the 2% floor for income is very true and what ive been told - even as residents if we have a working spouse, we are likely not to be able to meet that requirement since the 2% income floor is wayyy exceed- and if just exclusively for moonlighting i am not sure that would fly given that moonlighting is not a business and you do not create an LLC entity to moonlight.
Even if independent contractor I doubt it would qualify? Additionally if moonlighting internally - ie in one's program with a training license, this falls even more short since no additional licensing might be needed.

If you get 1099 income for moonlighting it is indeed a business. No LLC needed.

 

[Raryn]

This is totally outside my wheelhouse, so I could be totally incorrect. However, I think there (might?) be two different issues at play here. The first question (and pub 529) relates to whether the cost of a medical license can be deducted on Sched A as an unreimbursed business expense. That answer is clearly no for your first license, theoretically yes for renewal however it no longer exists at all, and used to be subject to the 2% floor which made it practically impossible for most to claim anyway.

But, my understanding from the question is whether you can deduct the cost of the license from moonlighting income. In that case, you're receiving a 1099 as an independent contractor. Assuming that you decide to file Sched C as a small business, then the question is whether that counts as a qualified business expense on Sched C, which (I think?) is covered by pub 535: https://www.irs.gov/pub/irs-pdf/p535.pdf

I think (maybe?) that a medical license would qualify as a section 197 intangible asset (page 30 of the PDF) -- they mention as examples the cost of a liquor license or a taxi medallion. Seems very similar to me. Problem is, you need to amortize it over 15 years (which seems crazy, since the license is usually only good for 3-5 years, so seems you should amortize it over that period of time).

In any case, if you have to amortize it over a long period of time, it may simply not be worth it.

Any and all of this could be wrong. The only thing that I'm almost certain of is that if you're filing Sched C, get professional help. And by "professional help", I mean "not me".

Ahhhhh. I thought I wasn't totally crazy - but I'll admit if I'm wrong.

With regards to Schedule C - some of those sections (like business start up costs) seem to say that while you can amortize it, you aren't required to - you can just deduct it off the bat.

I'd try to dig into it more, but Schedule C also hasn't applied to me in a couple years - and as I said above, I'm not revisiting old tax returns at this point.