Skip to main content
Message Font: Serif | Sans-Serif
 
No. of Recommendations: 0
Thank you very much, Ira. It makes sense. I appreciate your help.
Print the post Back To Top
No. of Recommendations: 6
I am a researcher at a university. A non-profit organization has agreed to fund my research, but they will report the amount of the grant on form 1099, which they will send me early next year. They said that, when filing my taxes for the year 2020, I can file a schedule C along with form 1040 and claim the expenses I incur on the research back. As you likely know, Schedule C is used to report income or loss from a business one operates as a sole proprietor. An activity qualifies as a business if (a) the primary purpose for engaging in the activity is for income or profit, and (b) one is involved in the activity with continuity and regularity. In other words, I am supposed to treat the amount of the research grant as business income, and the expenses I incur on the research project as business expenses.

... First, I have never heard of anything like this before. Has anyone else dealt with a similar situation? The thing that’s troubling me is that the primary purpose of my research endeavors are (obviously) not for profit and the IRS may not view the activity as a business, especially because the net profit from the activity will be zero (I will obviously spend all the money received on research related expenses, though not necessarily in the same year; see next point).

Your situation is not all that unusual, though a couple of questions come to mind. What's your status at the university? Are you a faculty member or other employee? A graduate student? Both? Neither? Actually, with respect to this project, I'm not sure it matters, but yes, this sounds like a situation where you will be treated as self-employed, and file Schedule C. And Schedule C is used more commonly than you probably think. In today's economy, more and more people are doing freelance work of all kinds, and filing a Schedule C.

So, whatever sort of research you will be doing, the nonprofit is not paying the university, they're paying YOU, in the form of a grant, and they will be issuing you a 1099-MISC. Actually, it's a very good thing that they're clarifying this in advance. And if you don't think of this as a business, well, this is one of those cases where you end up classified as self-employed, if only because no one is your employer. The nonprofit issuing the grant is not your employer, probably, because they don't have much control over your activities, and the university is not your employer, for this project at least, because they're not paying you. The 3rd-party grant payer is.

The thing that’s troubling me is that the primary purpose of my research endeavors are (obviously) not for profit and the IRS may not view the activity as a business, especially because the net profit from the activity will be zero (I will obviously spend all the money received on research related expenses, though not necessarily in the same year; see next point). I just don't want to get into trouble with the IRS or increase the likelihood that my tax return will be audited.

There's been a tendency here lately for people to use the word "obviously" to describe a situation that they're confused about. So thank you for the second sentence to give some clarification of that. Some research grants are designed and intended to cover direct research costs. Some grants made to researchers are to cover their living expenses while they're doing the research. The latter situation is most certainly income, and needs to be reported as such, and in your case it would be self-employment income.

Second, do I need to spend the entire amount received in a given year in the same year?

To come out with zero income, yes, assuming you file Schedule C on the cash basis, and I wouldn't recommend otherwise.

My research projects often extend for a few years, and it would be helpful for me to spread out the spending over at least a couple of years. Will Schedule C allow me to defer some expenses to the next year?

Assuming you file on the cash basis, no. If the grant is supposed to cover direct research costs, can the payment terms be arranged so they make payments based on a statement from you as to costs incurred, or expected to be incurred soon, with appropriate documentation? If so, that would give you some control over the cash flow, and help prevent a mismatch of income and expenses.

Bill
Print the post Back To Top
No. of Recommendations: 6
I agree with Bill's analysis up to the following, where I'd like to apply his comment about "obviously" to suggest that he answered a different question than the one rochish meant to ask.

My research projects often extend for a few years, and it would be helpful for me to spread out the spending over at least a couple of years. Will Schedule C allow me to defer some expenses to the next year?

Assuming you file on the cash basis, no. If the grant is supposed to cover direct research costs, can the payment terms be arranged so they make payments based on a statement from you as to costs incurred, or expected to be incurred soon, with appropriate documentation? If so, that would give you some control over the cash flow, and help prevent a mismatch of income and expenses.


I think what rochish might have been asking is whether s/he could claim expenses paid in later years if the grant was a one-time payment this year. The answer to that question is yes. You would show no receipt of income on Schedule C, but would continue to deduct any allowable expenses paid that year. The "problem" is that you will be paying income (and possibly self-employment) tax this year in exchange for a reduction in income (but not self-employment) tax in future years.

Ira
Print the post Back To Top
No. of Recommendations: 0
Hi Bill and Ira,

Thank you very much for the prompt response. This is very helpful.

Ira: Your interpretsrion of my question is correct. However, i did not quite understand how that would work. For the 2020 tax return, would I show the actual amount received (say, $10,000) and a part of it (say, $6, 000) as expenses, thereby paying taxes on the difference amount of $4,000? Then, assuming I spend the remaining amount of $4,000 next year, I would show zero income and a loss of 4,000 in the tax return for 2021?

Did I get that right?

Thanks again.
Print the post Back To Top
No. of Recommendations: 2
Ira: Your interpretsrion of my question is correct. However, i did not quite understand how that would work. For the 2020 tax return, would I show the actual amount received (say, $10,000) and a part of it (say, $6, 000) as expenses, thereby paying taxes on the difference amount of $4,000? Then, assuming I spend the remaining amount of $4,000 next year, I would show zero income and a loss of 4,000 in the tax return for 2021?

Yes, that is correct. The "problem" is that, using your numbers, you would also pay Medicare (and possibly Social Security) tax on the $4,000 income this year. Next year, while you would get the benefit of the $4000 loss on your income tax, you wouldn't get a reduction on your Social Security/Medicare.

That's why Bill suggested seeing if you could have the grant disbursements scheduled to match the timing of your anticipated expenses.

Ira
Print the post Back To Top
No. of Recommendations: 0
Thank you very much, Ira. It makes sense. I appreciate your help.
Print the post Back To Top