SE income or Line 21 prize?

[Zee]

But the grant comes [i]before[/b] the person performs the tasks or work associated with it. The prize comes only after, and only if they win.

Are the expenses that he incurred to participate in the contest deductible on Schedule C?

This is very subtle. If he has taken such deductions in the past, then he himself sees his participation in the contest as a work activity that is part of the business he owns. If he has not taken such deductions in the past, then perhaps he doesn't see it that way.

I'm not saying that the taxpayer's perception is dispositive. But over time, there may or may not be a pattern that helps determine whether participation in contests is actually part of a business activity...

If this thing was reported on Form 1099-MISC, I'll bet it's in Box 3, for "Other Income." Prizes are generally not reported in Box 7.

I have argued in many other posts that:

It is not the reporting documents that determine the tax treatment of an item; rather it is the nature and character of the income that determines the proper classification.

Putting a number in wrong box on Form 1099-MISC doesn't convert it from self-employment income, to say, rental income. Sometimes the form is just plain wrong. The IRS and the courts are going to look at the source of the income if there is a substantive dispute.

With that being said, the reporting document does, in may cases, create a valid presumption about the nature and type of income.

So...

If it's reported in Box 3 of Form 1099-MISC, it will probably never be challenged by the IRS if it is reported as a prize on Line 21. The matching program certainly doesn't look at the identity of the payer. The IRS would have to become interested in the return for some other reason before this came up.

Burton M. Koss
koss@usakoss.net

I Agree. Better written than my post.

[Jesse]

I agree it is not the reporting documents that determine the tax treatment of an item; rather it is the nature and character of the income that determine the proper classification. In this case a 1099MISC was not been issued (at least not yet).

This is a new client and the previous preparer put all expenses on Sched C and the prize money on line 21. Client also said he never received a 1099MISC from the company from last year either(same sponsor).

I have suggested any mixed use expenses, such as his boat, say 10%personal/90%business to keep an element of personal use, just pulling this number out of the air and told him to add hours or days of total use vs. guiding clients to determine a guestimate % of each. Although he argues that even his personal use is business because he is looking for "hot spots" to take his clients. He has mixed years from the past some years w/ income some years w/ losses, and even if there are no red flags I want to cover my A$$. I still leaning toward SE income.

Veritas I did read your exerpt and this definitely is not a hobby.