The treatment of royalties arising from textbooks presents several interesting issues. If the amounts received are considered "royalties" then they are subject the net investment income tax (NIIT). In contrast, if the "royalties" are considered business income, then
(1) they are not subject to the NIIT
(2) are subject to self employment taxes (2.9% + 12.4%) less the deduction for half of the SE tax
(3) could be qualified business income for the Sec. 199A qualified business income deduction of 20% and
(4) would serve as the basis for a deduction for a SEP (simplified employee pension plan).
From the Tax Advisor (12-2013):
"The IRS has ruled that an individual who writes only one book as a sideline and never revises it is not regularly engaged in an occupation or profession, and the book royalties are not considered earnings from self-employment. However, preparing new editions of the book and writing other books and materials reflect the conduct of a trade or business. Thus, a full-time professor who co-authors a textbook and does not engage in any other commercial authorship work while writing the textbook and has no obligation to work on future editions is not engaged in a trade or business. Even though an individual is retired and not currently involved in his or her creative pursuit of income, any royalties received are business income if the individual was engaged in the business at the time the material generating the royalties was produced. In summary, royalty income should be classified as business income for individuals who were in the business at the time the intellectual property was created (See Rev. Rul. 55-385, 1955-1 C.B. 100; Rev. Rul. 68-498, 1968-2 C.B.) 377..
