No one appreciates spending hard-earned money for professional licenses, regardless of their income. However, you may be able to deduct those expenses from your taxes. The quantity of your deduction may differ depending on whether you work as an employee or run a business.
Professional licenses must be “ordinary and necessary” for your job to be deducted at all, according to IRS Publication 529. The license must be a standard cost in your industry and appropriate and beneficial to your company. For instance, having a professional pilot’s license because you work as an airline pilot is relevant. On the other hand, maintaining your professional license won’t help you save money on taxes if you aren’t currently operating as a professional pilot.
The cost of the license is deductible in the year in which you pay the charge to a state or municipal government. For example, if you purchased a one-year license in June 2013, you can deduct the amount on your 2013 tax return, even if the license will be valid until May 2014.
You can deduct professional licensing expenses on Schedule C if you manage your own business as a sole proprietor. In Part V, under “Other Expenses,” list the type and cost of each license, then transfer the total to line 27a. Because it originates from your business income, this deduction lowers your income taxes and your self-employment taxes.
Suppose you’re an employee and your boss refuses to cover the cost of your work-related professional licenses. In that case, the good news is that such charges are deductible as an unreimbursed employee expense. The bad news is that you can only deduct unreimbursed employee expenses up to 2% of your adjusted gross income. If your adjusted gross income is $150,000, you must have $3,000 in unreimbursed employee expenditures before claiming a deduction. However, you can combine your licensing payments with other non-reimbursed employee expenses like professional society dues or the cost of trade magazine subscriptions relevant to your job.