Royalties reported on Line 1, ordinary income, or on Line 6 of Schedule K-1 can still be included in QBI.
Click this link for resources about the Qualified Business Income Deduction.
See excerpts from Form 1120-S Instructions below:
Per the 2019 IRS Instructions for Form 1120-S
page 9: Portfolio Income: Generally, portfolio income includes all gross income, other than income derived in the ordinary course of a trade or business, that is attributable to interest; dividends; royalties; income from a real estate investment trust, a regulated investment company, a real estate mortgage investment conduit, a common trust fund, a controlled foreign corporation, a qualified electing fund, or a cooperative; income from the disposition of property that produces income of a type defined as portfolio income; and income from the disposition of property held for investment.
See Self-Charged Interest, later, for an exception.
Solely for purposes of the preceding paragraph, gross income derived in the ordinary course of a trade or business includes (and portfolio income, therefore, doesn't include) the following types of income.
• Interest income on loans and investments made in the ordinary course of a trade or business of lending money.
• Interest on accounts receivable arising from the performance of services or the sale of property in the ordinary course of a trade or business of performing such services or selling such property, but only if credit is customarily offered to customers of the business.
• Income from investments made in the ordinary course of a trade or business of furnishing insurance or annuity contracts or reinsuring risks underwritten by insurance companies.
• Income or gain derived in the ordinary course of an activity of trading or dealing in any property if such activity constitutes a trade or business (unless the dealer held the property for investment at any time before such income or gain is recognized).
• Royalties derived by the taxpayer in the ordinary course of a trade or business of licensing intangible property.
• Amounts included in the gross income of a patron of a cooperative by reason of any payment or allocation to the patron based on patronage occurring with respect to a trade or business of the patron.
• Other income identified by the IRS as income derived by the taxpayer in the ordinary course of a trade or business.
page 13: Line 1a. Gross Receipts or Sales Enter on line 1a gross receipts or sales from all business operations except for amounts that must be reported on lines 4 and 5.
page 24:Line 6. Royalties Enter the royalties received by the corporation. Schedule K-1. Enter each shareholder's pro rata share of royalties in box 6 of Schedule K-1.
page 38: QBI may also include rental income or losses or royalty income, if the activity rises to the level of a trade or business, or is a qualified trade or business for purposes of section 199A
