If the amount you received was the $1,035 then you should enter the total from box 2 as income and the "Taxes" shown under "Taxes and Licenses" in your deductions for your 1065. The "Other Deductions" should be entered under "All Other Deductions" and list "Other Deductions" as the Description.
If you received the $1,418.95, then you will list that as your Royalty income and disregard the notations at the top of the form.
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