Franz,
I have not practiced in a number of years, but here are some guidelines.
First, the general rule is that this would be taxable on a pro-ratable basis. However, I believe that there is a de minimus amount of $600. That is, if the individual receives less that $600 the entitity paying the compensation does not have to provide a form 1099. So, if its less than $600 the individual is on the honor system so to speak (if you know what I mean). You, as the payor would not have to file forms 1096/1099.
Generally, the individual's use of the proceeds would not matter. It would all be considered income. I could think of ways to possibly avoid this, but it would greatly complicate the answer. For example, if the money would be used as seed capital for the business and the payee would take an equity stake in either a partnership or corporation. But this is a complication.
I am not sure about the scholarship issue for a graduating senior. Maybe your financial aid or bursar's office would be of help.
Finally, you may want to confirm the above with a practicing CPA. I'm sure there are plenty of them in Birmingham. In fact, back in the day I knew some myself!
-Wayne
Wayne Grossman
Associate Professor
Department of Business 3N219
College of Staten Island/CUNY
2800 Victory Blvd.
Staten Island, NY 10314
Phone: 718-982-2973
Fax: 718-982-2965
-----Original Message-----
From: Lohrke, Franz T.
ftlohrke@SAMFORD.EDU
Sent 3/31/2009 2:59:22 PM
To:
ENTREP@AOMLISTS.PACE.EDU
Subject: [ENTREP] Student tax implications for business plan competition prize money
HelloEveryone,
Withobvious apologies to list members outside the U.S.
Ihad a tax question that I was hoping someone on the list might have someinsights about. I know that generally this wouldnt be the Listservto use for U.S. Internal Revenue Service (IRS) questions, but Im hopingto tap the collective wisdom of the group.
Wehave a business plan competition next month, and the question came up recently aboutthe tax issues related to prize money. Inour business plan competition, our top prize for the Freshman division is$2,500, but that will be split 5 ways because students are entering in teamsfrom our World of Business class, so $500 each doesnt seem likeits worth worrying about. The IRS may beg to differ onthis point, of course. According to their website (http://www.irs.gov/newsroom/article/0,,id=175963,00.html):
Prizes and awards
Subject to certain exceptions, the cash value ofprizes or awards won in a drawing, quiz show program, beauty contest, or otherevent, must be included on the tax return as taxable income.
Taxpayers must also report the fair market valueof merchandise or products won as a prize or award, as taxable income.
For example, both a $500 cash prize and the fairmarket value of a new range won in a baking contest must be reported as otherincome on Form 1040, Line 21.
Irealize that actually paying the taxes on prize money would be the winningstudents responsibilityIm just wondering if the Universityneeds to collect Social Security Numbers and issue IRS Form #1099 to them ifthey win.
Thisbecomes particularly relevant because the top prize for our Open Division (for our upperclassmen Business students andnon-Business students from across campus) is $7,500. Hypothetically, ifthis were to be won by a team with one or two people, does anyone know if wehave start worrying about tax issues (e.g., issue#1099 forms)? Would it matter if they were a continuing student, and,thus, could perhaps count it as a scholarship, versus a graduatingsenior? What about if they took the money and started a business with it(obviously, our primary goal) versus took a post-graduation trip to Tahiti withthe money?
Again,I wont quote anyone who respondsI just thought someone might haverun into this issue with business plan competition prize money before.
Thanks so much for any suggestions you might have.
Bestregards,
FranzLohrke
++++++++++++++++++++++++++++++++++++++++++++++++++++
Franz T. Lohrke
Chair, Department of Entrepreneurship, Management Marketing
2008-2009 Brock School of Business Advisory Board ResearchFellow
Brock School of Business
Samford University
800 Lakeshore Drive
Birmingham, AL 35229
Office: (205) 726-2373
Fax: (205) 726-2464
http://www.samford.edu/~ftlohrke
++++++++++++++++++++++++++++++++++++++++++++++++++++
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This message is from ENTREP which is sponsored by the Entrepreneurship Division of the Academy of Management.
Please do not post messages with attached files. Commercial messages or spammed messages are not allowed on the list. The use of auto-responder "out-of-office" messages may also lead to your removal from the list.
You can manage your subscription options, including joining or leaving the list here:
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If you have questions or need help, please contact Dr. John Bunch
jbunch@benedictine.edu.
Ventures HO!