TAXATION OF RESEARCH GRANTS

Technical topics regarding tax preparation.
#1
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I have read some of the discussions but nothing seems to address this situation. My client has lived in India since 2018 but is based out of Oregon. She was awarded an National Geographic explorer grant of $60,000 to do environmental research in India. According to the grant documentation the grant was for expenses for the research and if she spends it for anything else she needs to pay it back to NG. There is a strict budget she has to account for and present to NG at the end of the project when she has to present her report. NG has a right to the research and media assets created by the research with no fees as does she and if they ask her to help produce a product for NG she will be compensated for it at their normal rates and get credit for the work. They made it clear that she is not affiliated with NG and is an independent contractor. She received a 1099-NEC for 64,000 from NGS (additional funds for covid related expenses as she was stuck in India since the pandemic).

My question: it appears that the funds are restricted and an accounting must be done at the end of the project and yet they issued her a 1099NEC for the full amount indicating that it is non employee compensation for services. Reading the grant letter it appears what she gets from this is the ability to use the project results and media assets herself (say to write a book or article) and so do they. Or would this be a non taxable grant (as some of her colleagues allege) based on guidance from IRS website that the award is non discriminatory and "c. The grant's purpose is to achieve a specific objective, produce a report or similar product, or improve or enhance a literary, artistic, musical, scientific, teaching, or similar capacity, skill or talent of the grantee."? And if it is non employee comp is this subject to self employment tax? If so the SE tax bite might eat into what she has of the research funds. Any elucidation on this would be appreciated. Does not seem to be a lot of guidance out there on this kind of situation. Usually it is in conjunction with education. She already has her Ph.D.
 

#2
HowardS  
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I'll start the conversation claiming no expertise.
Yes, self employment income.
She could qualify for FEIE (or FTA if taxed by India) but would still pay SE tax.

Got to be some expenses in there to reduce the income.

See:https://www.law.cornell.edu/cfr/text/26/1.117-4
Retired, no salvage value.
 

#3
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GWNWCPAEA wrote:According to the grant documentation the grant was for expenses for the research and if she spends it for anything else she needs to pay it back to NG. There is a strict budget she has to account for and present to NG at the end of the project when she has to present her report.


Definitely not an expert in this subject either, but it would seem to me that if this is more of an advance to pay for expenses directly related to the research then it shouldn't be taxable income to your client. If any of the allowable expenses are for her normal living expenses while on this project then I would suspect that portion of the grant actual used for personal expenses in the current year would be income.

Don't take this as facts...I'm just throwing some thoughts out there.
 

#4
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Thank you both for the reply. I can get a foreign income exclusion for any net income but the SE tax will still affect her. Not sure that this would be SE tax as the funds were clearing marked as payment for research project expenses (and were clearly restricted for that and an accounting was required) and not as compensation for services and yet they issued her the 1099-NEC. The bit about not taxable if it is for a specific report or to enhance a persons abilities is interesting. From the IRS website regarding non profit grants to individuals.
 

#5
HowardS  
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I think with the accounting you have available a schedule C reporting the NEC and the offsetting expenses against that income for a net zero would be the way I would go.
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#6
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That was where I was heading but her expenses do not add up to the grant, some of it timing differences (she could not, because of covid in India, make the payment to some of the vendors. Not sure of the logistics of that) that choosing accrual method helped but some of them she has not accrued yet. Two year project (report due 2022) but they gave her and reported full amount in 2020. With 2555 she still ends up owing about a grand in SE tax which might be the best of all possible outcomes. But I thought if I could save her that $1000 by digging a little deeper it would be worth a shot.
 

#7
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Perhaps a line item on Schedule C page two in the amount needed to zero out the "income" from expenses not yet paid? I mean really if it doesn't get reported like this what is she going to have next year? A Schedule C just showing those expenses possibly generating an NOL? To be carried back to 2020 and zero it out anyway?

I would have no problem whatsoever reporting it all on Schedule C with zero profit/loss and move on.
 

#8
Nilodop  
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Based on expediency? Or law?
 

#9
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Nilodop wrote:Based on expediency? Or law?


Both. From the facts presented I believe (as does the OP) that this money received should not have been reported as non-employee compensation. But we all know it is easier to report the erroneous amount on Schedule C and back it out to avoid a matching notice. The backing out of this "income" is not attempting to report expenses in the current year, it is just to keep the notice away. If you want to follow the law then the client should only report the gross income from this activity and that certainly does not sound like it is the full 64,000 as reported on the 1099-NEC.
 

#10
Nilodop  
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I wonder if unexpended amounts are required to be returned. Is it income received in advance by a cash-method taxpayer, or is it an advance under an accountable plan for a contractor?
 

#11
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GWNWCPAEA wrote:According to the grant documentation the grant was for expenses for the research and if she spends it for anything else she needs to pay it back to NG. There is a strict budget she has to account for and present to NG at the end of the project when she has to present her report.
 

#12
Nilodop  
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OK, then it's just an advance for expenses to be accounted for, right? Not gross income.
 

#13
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That's the way I see it.

Of course that's just my opinion, I may be wrong.
 

#14
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Nilodop wrote:OK, then it's just an advance for expenses to be accounted for, right? Not gross income.


That is indeed what the contract says and that seems to be the best solution. Thank you all for the ideas and response.
 


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