Book royalties not always considered business income

[jeffgeoghegan]

It is my understanding that money earned annually from royalties on a book written awhile ago (over 10 years ago for mine) should not be considered business or self-employment income. Here's what I found from a website dealing with these issues: "an author who wrote a book, but who is not otherwise engaged in the trade of writing for profit, would not have to pay self-employment taxes on the book's royalties." Yet, TurboTax doesn't give this option. Could you please look into this and give me an answer other than "authors are considered a business and need to report royalties as self-employment income" that I've found several times in this forum? I don't think this is accurate, but TurboTax doesn't allow for any other option. Thank you.

[Yulia1]

Where can i report it instead?

[MaryEllen · Accepted solution]

If you are no longer in the business of writer, you would report your royaly on Schedule E, and not on Schedule C. This will prevent self-employment tax from being calculated on the royalty income. If you are still in the business of writer, all royalties would be subject to self-employment tax.

According to IRS filing instructions for Schedule E -

Report on line 4 royalties from oil, gas, or mineral properties (not including operating interests); copyrights; and patents. Use a separate column (A, B, or C) for each royalty property.

If you received $10 or more in royalties during 2013, the payer should send you a Form 1099-MISC or similar statement by January 31, 2014, showing the amount you received. Report this amount on line 4.

If you are in business as a self-employed writer, inventor, artist, etc., report your royalty income and expenses on Schedule C or C-EZ.

[stevo14]

How do we get Turbotax to allow us to use schedule E!  I have no clue.

[MaryEllen]

If you don't enter the 1099-Misc (delete the one you have already entered), but instead go to the section for entering rent or royalty and describe the property as Book Royalties, and the property type as intellectual property royalties, you should be able to add the amount of royalty you were paid in the income received and not have SE tax assessed against your income. The exact process will depend on what version of TurboTax you are using and if you are using the online or desktop version.

[DrProjectMan]

Thank you, thank you, TurboTaxMaryEllen, for a clear and sensible answer about the proper treatment of book royalty income for those of us who simply wrote a book once, and are not in any way operating a business to write and sell books!  In the terms used in the TurboTax help to differentiate the possible sources of 1099-MISC income, our book royalties are investment income, just like someone who makes money from leasing a piece of property to an oil or gas company.

[DrProjectMan]

Unfortunately, I can't get your response to stevo14's question about getting to Schedule E to work ("If you don't enter the 1099-Misc ..."), at least in the current Online version.  Once I hint that I have "book royalties", I'm told "TurboTax Premier is right for you.  Because you have rental property or royalty income, you’ll need TurboTax Premier to complete your taxes. ... Choose TurboTax Premier for ... $59.99* and pick up right where you left off."

[DrProjectMan]

OK, I get it.  Deluxe just doesn't include Schedule E, period (1).  Even if all you need is to report a book royalty payment on Line 4.   Grrr.  And how much extra work will Premium require just to get that one entry on one Form?  Having been an Intuit customer for a couple of decades, I think I know what the answer will be.

(1) "Deluxe doesn't cover your situation or include the IRS form Schedule E to report your rental property or royalty income. You’ll need to upgrade to Premier for ... $59.99* to file your taxes accurately."

[MaryEllen]

Yes, the Schedule E only appears in TurboTax Online Premier and Home and Business. You can find it in the desktop version of Deluxe. Would it make sense for you to download the desktop version and transfer your file from online to desktop?

[regierjeff]

Thank you MaryEllen, this answer was difficult to find but this worked!

[MaryEllen]

For 2014, Schedule E is only available in Premier and Home and Business versions. For 2015, it will be available in the Desktop Deluxe version also.

[null1]

I am using the Home & Business version in 4/2015 and TurboTax does not alert on these options. Should Turbotax offer upfront this option for authors who write a book as a hobby and one receives royalty?.

[stevo14]

I only received $41.46 in Book Royalties according to my 1099.  Why must I pay more than that to file a form that earned less than that?

[Taxgeek]

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..

[Shakkaboom]

The Tax Advisor seems to contradict Mary Ellen? What is the answer?

I am no longer "in the business" of writing books, but was several years ago and still receive revenue and royalties....although very minimal. I have been dong a Sch C for several years, but seems like overkill for a few dollars.  I am happy to pay more tax and call it investment income for the simplicity.  

Mary Ellen says:  "If you are no longer in the business of writer, you would report your royaly on Schedule E, and not on Schedule C."

Tax Advisor 12/2013 says: "royalty income should be classified as business income for individuals who were in the business at the time the intellectual property was created."