Book royalties not always considered business income

[DaveF1006]

Royalty income derived from authoring and publishing a book are always considered self-employment income.  Royalties reported on Schedule E are derived from asset producing property such as oil wells and do not pertain to writing.

Please review this Turbo Tax document for verification .

[Shakkaboom]

So... because I get a 1099-MISC for book royalties for publishing 5 years ago (<$20)...therefore I am in the business of publishing even though I had no activities in the current year that would indicate I operated a trade or business? I could easily come up with a few "expenses" on Sch C that would totally offset this income, but that seems a bit silly (that is what I have done for the past 4 years...eg proof that it is NOT a business). Is there any way to just file this as hobby income? Or am I forced to file a Sch C for eternity if I keep getting a 1099-MISC?

I guess technically I must file a Sch C according to TheTaxAdvisor.com ["royalty income should be classified as business income for individuals who were in the business at the time the intellectual property was created"], but the IRS publications cited really did not address this specific case.  With self-publishing this situation will not be so rare in the future.

[DaveF1006]

Yes as long as you receive royalty residual income from a book that you published, this is still technically considered self-employment income no matter how much income it generates.You can however report this as hobby income as you mentioned. Since the amount of money you receive is inconsequential. Here is how you declare your hobby income and expenses.

1. Sign into Turbo Tax
2. Click on Federal Taxes tab.
3. Choose Wages and Income.
4. Scroll down to Less Common Income and select Miscellaneous Income, 1099A, 1099-C.look for Hobby Income
5. Click Start to right of Hobby income and expenses.

You do not need to be in a Turbo Tax Self-Employed or Home and Business version(s) to declare Hobby income and Expenses. 

[Shakkaboom]

Thanks Dave,

I did not find a way to enter my 1099-MISC in hobby income.  Do I just enter the royalty amount ("Hobby Income received by YOU" on the form "Enter your hobby income and expenses for 2019") and delete what I had done in the 1099-MISC entry form (SchC and E).  I suppose there is somewhere I can make a note to let any auditor see that I have put the 1099-MISC income in this location?? Where?

[JulieS]

If you receive a 1099-MISC with income in box 2, you should enter it as a royalty. Here is how to do that:

1. Use the search box toward the upper right corner to search for 1099-MISC.
2. Enter your 1099-MISC information. 
3. On the screen titled, Source of 1099-MISC Income, you can select Investment income from property you own, or Royalty income from your business, including artist royalties or operating a natural resources business (Schedule C) If you are no longer in the business of writing, you should pick the first one. This will put the income on Schedule E.

If you report it as hobby income and the amount is more than $400, you are likely to get a letter from the IRS about it. 

[Shakkaboom]

Julie...Thanks, but you did not answer my question which was how to enter 1099-MISC as hobby income...unless you are saying that it is impossible to do in TurboTax.

[DaveF1006]

 There is no way to enter the income as hobby income directly from a 1099 MISC. Please us this link for guidance in reporting your income as hobby income. In your case, I suggest not entering the 1099 MISC but enter this income as hobby income in the steps prescribed in the link. If the IRS questions you in the future about not the reporting the 1099 MISC you can say that you are not in the business of making a profit thus you reported  therefore you are claiming this as hobby directly income. Do not report this as investment royalty income as suggested in a previous post. Here are the steps to enter as hobby income.

• Choose Wages and Income
• Scroll down to Less Common Income and click Start to to right of Miscellaneous Income, 1099-A, 1099-C
• Click Start to right of Hobby income and expenses

In the description field, enter something like residual book royalties. .

[Shakkaboom]

DaveF...Thanks for the advice.  I think I will go ahead and NOT ENTER THE 1099-MISC DIRECTLY as you suggest. I will manually enter the income in the HOBBY INCOME section of TurboTax and I will manually enter the tax withheld REPORTED ON the 1099-MISC in DED & CREDITS/OTHER INCOME TAXES/WITHHOLDING NOT ALREADY ENTERED ON A W-2 OR 1099. I think I will also add a line in OTHER INCOME written as "1099-MISC royalty income of $20 reported as Hobby Income" with a value of 0.    I AM DOING THIS SO ANYONE REVIEWING SCH 1 WILL SEE THIS COMMENT DIRECTLY BELOW THE "NOT FOR PROFIT ACTIVITY INCOME"  that is generated by my entry in the Hobby SECTION of TurboTax.  DOES THIS MAKE SENSE?

[DaveF1006]

 Yes, and that is perfectly acceptable.

[megschell]

Not so.

The royalties are still considered SE Income even when retired, if the royalty was from work produced while self employed.

[DaveF1006]

Contrary to popular belief, according to this link from Turbo Tax, "if you receive a 

1099-MISC is reflected in Box 2 it will be reported on Schedule E with your Tax Return. Per the IRS: Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income."  If  there is an amount listed in Box 7, then this income would need to be reported on a Schedule C.

[Taxgeek]

In this case, I'm the one who picks the box where those payments go.  The literature is not clear about income from copyrights where the materials must be updated annually.

[DawnC]

Did you receive a 1099?   Factors affecting the federal income tax treatment of income related to intellectual property include whether to classify a creative activity as a trade or business, the timing and characterization of income received, and who owns the property.  In general, copyrights and patents generate royalty income reported on Schedule E, Supplemental Income and Loss, unless it is characterized as business income reported on Schedule C, Profit or Loss From Business (Sole Proprietorship).

However, who owns the intellectual property, i.e., the creator or the party who requested its development, also determines the type of income reported. The proper classification of royalties also affects the recipient’s tax liability in other ways, including self-employment tax, investment interest deduction limitations, and the new 3.8% net investment income tax on unearned income.

See Costs to Create Intellectual Property for more information.   @Taxgeek

[JTM-RLM]

Thanks, DawnC, for clarifying the decisive element for our situation. According to my husband (the author with on-going new books and revisions), he receives the royalties annually, but his publisher actually owns the copyright (i.e., his work was not self-published). Given your 2/2021 response on this thread, I believe that I have my answer to this issue, at least for our particular situation.

[kingckat]

I spent an hour with a TurboTax helper on this issue. I had small royalties from books I wrote several years ago.  The only solution was to enter the royalty amounts on the 1099-Misc section and then fill out Schedule C as follows:

A   Profession: Writer

B   Business code: 711500  (the IRS code for writer, which the TT helper looked up for me).

C   Business name: my name

D   Leave blank

E    Business address: my home address

F    Accounting method: Cash

G and H     check No on boxes

That's all you need to do.