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Grants to a Nonresident Alien

Grants to individuals for travel, study, or other similar purposes are taxable expenditures, unless the following conditions are met: The grant must be awarded on an objective and nondiscriminatory basis under a procedure approved in advance by the IRS, and it must be shown to the satisfaction of the IRS that one of the following requirements is met: (a) the grant is a scholarship or fellowship and is to be used for study at an educational institution that normally maintains a regular faculty and curriculum and normally has a regularly organized body of students in attendance at the place where the educational activities are carried on. For these purposes, there is no requirement that the grant recipients be limited to degree candidates, nor must the grant be limited to tuition, fees, and course-required books, supplies, and equipment. A recipient may use grant funds for room, board, travel, research, clerical help, or equipment, that are incidental to the purposes of the scholarship or fellowship grant. (b) the grant qualifies as a prize or award that is excludible from gross income under Internal Revenue Code section 74(b), if the recipient is selected from the general public. For this purpose, the recipient may keep the prize or award, and need not authorize the foundation to transfer the prize or award to a governmental unit or to another charity; (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.

Grant vs. Scholarship/Fellowship:
  • Grant/Payment for Services: directly benefits the payer (not recipient).  Without a business purpose, payments and the reimbursed expenses are in the nature of a grant.
  • Scholarship/Fellowship: primary purpose is to further the education and training of the recipient.
    • For tax purposes a scholarship or fellowship is an amount given to a recipient for the purpose of aiding him to perform study, training or research.
    • In addition, there must be no requirement that the recipient perform any services (past, present, or future) for the payor as a condition for receiving the grant.

Honorarium: The accountable plan rules for excluding reimbursed expenses from tax only apply if there is a business purpose for the visit. The gross amount of the grant is considered to be "fixed, determinable, annual, or periodical" income (FDAP):

  • Subject to withholding at 30%
  • No deductions allowed
  • Tax treaty may apply1042-S reporting

Scholarship/Fellowship: Nonresident in F, M, J, or Q status.  Services can be either as an employee or self-employed individual. Reporting of the grant on forms 1042 and 1042-S is required. Tax treaty may apply. Payments are subject to 14% withholding, however:

  • The withholding tax on the taxable portion of the grant may be calculated using the graduated rates in Circular E (IRS Pub. 15) instead of a flat 14% rate.
  • Sections 62, 162, and 274 of the Code allow an individual who is engaged in a U.S. trade or business, and who expects to be away from his tax home for not more than one year, to deduct "away-from-home" expenses (i.e., travel and lodging expenses incurred while away from home on business). (See Procedure 2000-9)
  • Section 871(c) of the Internal Revenue Code arbitrarily treats alien students and scholars in the USA on F, J, M, and Q visas as being "engaged in a U.S. trade or business." The advantages of such an arbitrary rule are that the withholding tax on the taxable portion of the grant will be only 14% instead of 30% and the grantee may deduct expenses against the grant before arriving at a net taxable grant.
  • Reimbursed expenses can be offset with a withholding allowance computed under the rules in Revenue Procedure 88-24.
  • Nonresidents in F, M, J, or Q status may file a specially prepared form W-4 with their withholding agent in order to claim estimated expenses against the taxable portion of their grant in order to reduce the withholding taxes to a minimum. Temporarily away-from-home expenses and the daily personal exemption amount (IRS Pub. 515, page 14) are examples. May use actual expense estimates or federal per diem rates used by federal employees. 
  • Steps to Follow to complete the W-4:
    • Compute total amount of the researcher's grant
    • Compute estimated away-from-home deductions and daily personal exemption amount
    • Subtract #2 from #1 to arrive at grants net taxable amountWithhold tax on the net taxable amount at the graduated rates in IRS Pub. 15, Circular E, instead of at the flat 14% rate. (Revenue Procedure 88-24.)
  • At Year End:
    • Report the grant on form 1042-S, using one line.
    • Box #2 -- Gross amount of grant before deductions.Box #3 -- Withholding allowances claimed by the recipient on form W-4 (i.e., the estimated away from home expenses and the daily personal exemption amount).
    • Box #4: Net taxable amount of the grant remaining, if any.
    • Box #5: Withholding rate percentage applied to the taxable amount of the grant from Circular E.
    • Box #7: Amount of income tax withheld

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