Need help: Donor will send me a form 1099 for a research grant

[bhusach]

Hello everyone,

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 may 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.

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).

I just don't want to get into trouble with the IRS or increase the likelihood that my tax return will be audited.

Any insights would be appreciated. Thank you in advance.

[Ruralguy]

I don't understand. If they are giving you the grant money why can't you just use that money?  I don't see what Schedule C has to do with it.

[bhusach]

Thank you for the prompt response, Ruralguy. They will report the amount of the research grant on form 1099 because they do not want to deal with compliance issues (i.e., whether the research grant money was actually spent on research and not just pocketed).

By issuing a form 1099, they are hoping that the awardees would spend the money on legitimate expenses, and keep receipts for IRS (otherwise, the awardees can get into trouble with the IRS).

Basically, they are delegating the task of vetting receipts to the IRS.

Hope that helps. Please let me know if you have any thoughts on how to deal with the issue.

[Hibush]

This sounds awful. Unless you are using all of the research grant for your salary, in which case you will likely come out ok.

Are you an independent researcher, or should this actually be run through the institution? If the latter, is the donor too inexperienced to handle research grants and therefore unwilling to do the basic compliance stuff?

The IRS no longer has the staff to do any vetting, but their computers are pretty good at it.

[bhusach]

Yes, I agree. I'm not using any part of the grant for my salary.

Also, I am not an independent researcher, but am affiliated with a university. The donor is indeed quite inexperienced.

Any other thoughts are welcome. Thanks again!

[mamselle]

Have you already been in touch with your Research Support Office?

They may have a way of talking with the donor to get things worked out more efficaciously.

(Or they may not...at one place, I had to call or visit our RSO agent daily to get them to do anything in a timely fashion...sometimes for weeks)

M.

[research_prof]

Yes, I agree. I'm not using any part of the grant for my salary.

Also, I am not an independent researcher, but am affiliated with a university. The donor is indeed quite inexperienced.

Any other thoughts are welcome. Thanks again!

Can you ask the university's research office to deal with the situation and get you out of it?

[bhusach]

Thank you for the thoughtful responses. Getting the university's research support office is a good idea to get out of the situation. I had considered having the funds directly sent to the university, rather than to me.  I was reluctant to pursue that approach earlier because (a) it would entail an overhead for the university, and (b) doing so would introduce additional constraints on how the funds can be used. But, if there is no other option, I will explore that route.

[Ruralguy]

I still don't get it. They've opted out of compliance. They are issuing a 1099 and giving you the money.
If you just report it as income, you can use it for whatever you want. Of course, you'll then have to pay the taxes.
Now if the grantors want to see the Schedule C, that's another story.  Or, if the grantors allow it, you can go through your school. Some wont allow it because the rules for the grant prohibit use for overhead.

[mamselle]

There are cases where the overhead can be waived.

Not often, and sometimes not very easily, but it might be worth asking about

If it's a "small enough" grant that the % would be baby potatoes-sized, they might let it go.

More likely in the humanities than in the sciences, too...so here there be alligators in that moat...

M.

[bhusach]

Thank you again for your insightful and helpful responses. I appreciate it.

[pgher]

Thank you for the thoughtful responses. Getting the university's research support office is a good idea to get out of the situation. I had considered having the funds directly sent to the university, rather than to me.  I was reluctant to pursue that approach earlier because (a) it would entail an overhead for the university, and (b) doing so would introduce additional constraints on how the funds can be used. But, if there is no other option, I will explore that route.

This is the trade we make: route money through our university, pay their overhead, follow their rules, and let them worry about compliance and taxes. Or, take the money directly (in my case, as a consultant), get it all, use it as we see fit, and assume the liability. You can't get all the money without strings attached and avoid the liability.

[retired_prof]

I don't think this is a big deal.  You report the amount on the 1099 as schedule c income and then as long as you spend it all you report the same amount as expenses and it nets to zero.  I do this with hobby income from photography.  From memory I think my wife as occasionally done speaking engagements that paid an honorarium where they tacked on the expense reimbursement to the 1099.  We reported the entire amount as schedule c income and then added the expense portion to schedule c expenses.

[mamselle]

Yes, but some schools don't like you earning extra money on their time without their knowing about it.

Contact your RSO.

M.

[bhusach]

Thank you for the additional insights.

Retired_prof: It is reassuring to know that it worked for you. I was just concerned that the IRS may find it suspicious that the income from the grant was equal to expenses on the research project (i.e., the profit was zero), given that Schedule C is supposed to be filed for "businesses," defined as entities designed to make a profit.

However, based on your experience, I think that's the route I will follow (instead of routing the funds through my organization).

Thanks again! I appreciate your help.