Where do I report royalties from a book writing partnership?

[anton]

We are a husband-wife partnership. My wife writes books and I run the marketing and advertising campaigns. We sell the books on Amazon. Amazon pays us royalties for the books sold. We received form 1099-MISC from Amazon that lists the royalties in box 2. We need to file form 1065 and I am wondering where on this form I should enter the royalties? Should I enter them in the Income section, line 7 (Other Income) on page 1 of form 1065, or on Schedule K at line 7 (Royalties)? These are not passive royalties, we are actively involved in the book writing, publishing, and advertising process. 

[PaulaM · Accepted solution]

Royalties received for written works, if your are in the business of writing, are considered self-employment income and not royalty income. Normally, this would be on a Schedule C on your personal return.

If instead, you are filing your business on a Form 1065, then it would be under the Income menu as Business Income, not Other Income.  Enter your expenses under the Deductions Menu. The net profit/loss will flow to the K-1's and the K-1's will be entered on your personal return.

[maglib]

The IRS makes a critical distinction between  authors and hobbyists. Authors are trying to make a living selling their writing.  You are deemed to be a professional if you are trying to make a profit in the last 2 of 5 years. So the intent to make a profit is important.  

If you are in the business of being an author:

Royalties from copyrights, patents, and oil, gas, and mineral properties are taxable as ordinary income.

In most cases, you report royalties in Part I of Schedule E (Form 1040). 

However , if you hold an operating oil, gas, or mineral interest or are in business as a self-employed writer, inventor, artist, etc., report your income and expenses on Schedule C or Schedule C-EZ (Form 1040).  This can be done using TT Self Employed.

If it is a hobby where you don't intend to make a living then you report the income 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

·        The IRS doesn't allow you to deduct hobby expenses directly from hobby income. Instead, you can deduct expenses as an itemized deduction subject to 2% of your adjusted gross income. Also, the amount that you claim as an expense cannot be greater than your income from the hobby. In other words, your hobby cannot generate a loss.

·        Taxpayers can choose to itemize expenses on their tax returns or take the standard allowable deduction. Hobby expenses can only be deducted if you itemize your deductions.

If you don't have any other itemized deductions, TurboTax will deduct the greater of the standard deduction or itemized deductions. TurboTax will choose the one that lowers your overall tax liability.

·        If you are in the business, use TT Self Employed and enter as SE income on schedule C or C-EZ by following the interview and reporting as a business.