Pol-Taxation of Professional Exam Fees

policy taxation professional exam fees modified Wed Mar 04 2020 09:11:35 GMT-0500 (Eastern Standard Time)

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University of Louisville

OFFICIAL
UNIVERSITY
ADMINISTRATIVE
POLICY

POLICY NAME

Taxation of Professional Exam Fees

EFFECTIVE DATE

June 20, 2014

POLICY APPLICABILITY

This policy applies to all University Employees (administrators, faculty, and staff).

POLICY STATEMENT

In accordance with IRS rules and regulations, professional examination fees or any other costs paid on behalf of employees leading to a new license, certification, or skill are reportable as taxable fringe benefits to employees.

REASON FOR POLICY

The purpose of this policy is to inform University departments of the potential tax issues surrounding the payment of exam fees or other professional certification expenditures made on behalf of employees.

From time to time, departments request payments for professional exam fees or other costs relating to professional certification or licensure on behalf of their employees. Such payments are made at the discretion of each department and are provided as either a reimbursement to the employee or are paid directly to the certifying body itself through either a Request for Disbursement or using a departmental procurement card.

While the nature and purpose of these fees can vary, the Internal Revenue Service (IRS) usually treats such payments as fringe benefits subject to taxation. It is a common misconception that payments for expenses relating to professional certifications can be provided to an employee free of tax if the department requires the employee to seek the certification or if the department is somehow benefited by it. According to the IRS, however, employer motivation is not the primary test in determining whether or not a taxable benefit has ultimately been provided to an employee.

RELATED INFORMATION

If a payment or reimbursement relates to maintaining an employee’s existing license, certification, or skill, then the payment can be treated as a working condition fringe benefit under Internal Revenue Code (IRC) § 132(d) and thus excluded from an employee’s taxable income.  Examples of working condition fringe benefits include:

  • Fees relating to medical, attorney, or Certified Public Accountant (CPA) license renewals
  • Professional society dues relating to the employee’s current job duties
  • Fees for continuing education courses that enhance an existing skill or job duty
  • Certain periodic exam fees necessary to renew or maintain an existing certification, license, or skill

Payments or reimbursements made to acquire a new license, certification, or skill are taxable to the employee. Examples include:

  • Exam fees or any other fees paid to acquire an initial medical license or initial certification in a specialized area of medicine
  • CPA exam fees or amounts paid for an initial CPA license
  • Bar exam fees and incidental expenses in securing initial admission to the bar
  • Fees paid for professional examination review courses

The examples above are not all-inclusive. Additional examples and guidance can be found in Treasury regulation § 1.162-5 and IRS Publications 529, 535, and 970.

PROCEDURES

If an employee or department believes that a particular payment or item of reimbursement does not result in a new license, certification, or skill, then the employee or unit business manager should submit a thorough written explanation detailing the nature of the expense along with any related documentation (including documentation substantiating any existing license, certification, or skill) to the Tax Department. This process should be used regardless of the method of payment (i.e. reimbursement or direct payment via check or procurement card).

The Tax Department will examine all available facts and circumstances and determine if the expenditure qualifies as an excludible working condition fringe benefit under IRC § 132(d).

RESPONSIBILITIES

Department – Identify expense subject to withholding and notify Payroll Services

Payroll Services – Withhold on taxable fringe benefits

Tax Department – Examine documentation of any taxable fringe benefit exclusion claims and determine if exclusion is appropriate

ADMINISTRATIVE AUTHORITY

Vice President for Finance and Chief Financial Officer

RESPONSIBLE UNIVERSITY DEPARTMENT/DIVISION

Controller’s Office
Tax Department
Service Complex, Louisville, KY 40292
502-852-3337
taxdept@louisville.edu

HISTORY

Revision Date(s): 5/12/2016
Reviewed Date(s): 1/15/2020, 5/12/2016

The University Policy and Procedure Library is updated regularly. In order to ensure a printed copy of this document is current, please access it online at http://louisville.edu/policies.