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[rugger]

Hi all,

Last year I received a $15k research grant from an outside organization. The grant/fellowship came to me personally, rather than through the University (I was a student at the time). The money was used entirely for research purposes - travel, data, etc. It was not used as a living stipend.

Yesterday I received a 1099-MISC for the amount of the grant. My question is, is there any way to lessen the tax burden given that the income was not really used as regular income? Would I consider it income to a consultancy business and write off the expenses as business expenses?

[melba_frilkins]

The thing about having a business on paper is that if you can't write off the entire amount, what's left you have to pay double taxes (income and social security). But if it's all deductible, that's not an issue.

You might look into it further. There may be different (and better) rules for students. When I was in grad school, I received an annual stipend. I was able to subtract out costs (e.g., tuition, travel) and then declare that diminished amount as income. This was a while back and I'm vague on the details. I do know I used just the simple EZ forms, not even the regular 1040.

Would it be possible to simply do a regular itemized tax return and claim the expenses/deductions that way?

[clean]

Forgive me for not coming up with the answer right away, but you will want to download Publication 17 from www.irs.gov

Expenses for academic research are (or can be anyway) deductable.  The problem is that I dont remember where exactly I found it... So download the pdf of pub. 17 and search "professor" and see if that comes up with anything.  Otherwise, look up academic. 

It may help.

Otherwise, you may be investing in a CPA this year to help with your taxes.

[parispundit]

Grants/Fellowships are not subject to social security taxes. They are subject to income taxes. If you have expenses, you will have to itemize them

One route might be to consider the fellowship business income and do a schedule C. This will avoid the need to itemize deductions on the rest of your return. Schedule C income IS subject to paying social security tax, but if your deductions mean your net income is 0, this is not an issue.

But you better either get the "Tax and Financial Guide for College Teachers", consult Prytania, or get a CPA.

[reener06]

Funny, I had this same question a few years ago and it prompted my first post to the fora. You may be able to find it.

In essence, the news was not great. You have to to declare it as income. I went to a CPA that wanted to charge around 1K to tackle this. We ended up doing it ourselves; however, it took some time to spend all the money, as some was for outside researchers who were waiting on data analysis from me, and the analysis took over 18 months. In fact, this may be the first year we don't claim this, as the money is finally gone.

We claimed it as a business, and deducted anything and everything. The business lost income each year, so we did not pay taxes on it. But I saved all receipts and itemized them. We measured parts of the home that were used as office and storage space related to the business, and deducted that percentage of rent and utilities. It took some time, but it is doable, and the most work is the first year.

Good luck--you have some time to do this, or can get an extension is you need it.

[username2]

If you can do this as a business, that's the way to go. Because even if you itemize, you should know that as an individual (vs. business) you cannot deduct spending on travel, even if you spent every last penny of that conference travel grant.... Ask me how I know that. You can only itemize from a small list of allowable expenses, generally tuition, books and required lab materials only, not optional materials, not living expenses. There are even rules that books should only be bought from the campus bookstore.

However, if you are declaring a business, and filling out a schedule C, you probably save more on taxes, but you do quite a bit more work. At the least you will have to start paying quarterly taxes after the first year. You will also be subject to self-employment tax rates on net income, which will include social security payments and is, I believe, something like 23%, so quite a bit higher than normal. I also recall something odd about being able to itemize travel but not being able to pay for research? I could be wrong on that. Definitely you cannot pay yourself for your time and then itemize that, unless you have set up the proper business structure.  But home office, depreciation on laptops, all that good stuff is allowed. Just be careful, there are lots of rules to follow to avoid looking like an audit risk.

[parispundit]

Self-employment income is normaly taxed at 15.3% for social security, except 2011 income will be taxed at 13.3%. If you show no net profit, you will NOT need to file estimated taxes the following year, as your estimated tax is zero.

[monsterx]

However, if you are declaring a business, and filling out a schedule C, you probably save more on taxes, but you do quite a bit more work. At the least you will have to start paying quarterly taxes after the first year. You will also be subject to self-employment tax rates on net income, which will include social security payments and is, I believe, something like 23%, so quite a bit higher than normal. I also recall something odd about being able to itemize travel but not being able to pay for research? I could be wrong on that. Definitely you cannot pay yourself for your time and then itemize that, unless you have set up the proper business structure.  But home office, depreciation on laptops, all that good stuff is allowed. Just be careful, there are lots of rules to follow to avoid looking like an audit risk.

I did this one year when I was in grad school.  I avoided paying any taxes on the grant this way, but I wasn't at all sure I'd done it right.  It was a great relief when the seven years passed, and I knew I wouldn't be audited on it. 

[parispundit]

Specially cause they only have three years after you file to challenge you, absent special circumstances like criminal intent.

[marooned]

If you can do this as a business, that's the way to go. Because even if you itemize, you should know that as an individual (vs. business) you cannot deduct spending on travel, even if you spent every last penny of that conference travel grant.... Ask me how I know that. You can only itemize from a small list of allowable expenses, generally tuition, books and required lab materials only, not optional materials, not living expenses. There are even rules that books should only be bought from the campus bookstore.

However, if you are declaring a business, and filling out a schedule C, you probably save more on taxes, but you do quite a bit more work. At the least you will have to start paying quarterly taxes after the first year. You will also be subject to self-employment tax rates on net income, which will include social security payments and is, I believe, something like 23%, so quite a bit higher than normal. I also recall something odd about being able to itemize travel but not being able to pay for research? I could be wrong on that. Definitely you cannot pay yourself for your time and then itemize that, unless you have set up the proper business structure.  But home office, depreciation on laptops, all that good stuff is allowed. Just be careful, there are lots of rules to follow to avoid looking like an audit risk.

Thank you so much for this explanation sir, there was some question in my mind.