Paul L. Caron
Dean




Friday, September 17, 2010

A CPA's Advice for Professors Wanting to Deduct Research Expenses

Following up on my posts (here and here) on last week's Tax Court decision denying a professor's claimed deductions for research expenses: Joe Kristan, Tax Traumas of the Tenured:

Some academics are choking on their brie and wine over a case we mentioned last week. The case involved a professor who was not allowed Schedule C deductions for some conference expenses. Some of the expenses were disallowed because the judge felt the taxpayer fell short of the documentation requirements under Sec. 274, but others were disallowed because he didn't establish they were business expenses, rather than unreimbursed employee business expenses. Schedule C expenses are fully deductible, while employee business expenses are deductible only to the extend they (combined with other "miscellaneous" deductions) exceed 2% of adjusted gross income -- and not at all for alternative minimum tax.

Professor Bainbridge points out that outside writing and research is expected of a professor. ... That's why having lawyers and professors for clients can be exhausting: you just want to finish a tax return, and they want to argue the tax law. Professor Bainbridge's preparer may be relying on Rev. Rul. 55-385 [which ruled that a full-time professor's book royalties constituted self-employment income]. ... 

[T]he question goes to the "regularly engaged" business. As Professor Bainbridge is a well-published prof-about-town, his preparer may have concluded that he was self-employed. The only litigated case I find on Rev. Rul 55-385 goes the other way. The case involved an Iowa State University assistant professor who wrote a textbook; the IRS wanted to put it on her schedule C and hit her with self-employment tax [Langford v. Commissioner, T.C. Memo 1988-300]. The judge held for the taxpayer. ...

Professor Bainbridge's preparer may also have had a practical motive. If the professor wasn't reimbursed by his university for conference travel costs, they would have been unreimbursed employee businesses expenses. I believe Professor Bainbridge lives in high-tax California; that means he is likely to have AMT liability, which would make such deductions worthless. Putting the income on Schedule C makes it possible to put the unreimbursed expenses on Schedule C, making the deductions worth something. Based on my admittedly limited exposure to academic tax returns, I suspect the deductions often exceed the royalties (raising potential hobby loss issues, but let's not go there now).

The Moral? If you are a professor, and you incur lots of outside expense, a Schedule C can be a good thing, if you have the records to back up your expenses.

Prior TaxProf Blog coverage:

https://taxprof.typepad.com/taxprof_blog/2010/09/a-cpas-advice.html

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