How do I report patent income as a capital gain when it has been reported on a 1099-Misc?

[Carl]

What box on the 1099-MISC is the income reported in?

[SweetieJean]

Did you sell your patent rights?

[SweetieJean]

See this:
<a rel="nofollow" target="_blank" href="https://www.lexisnexis.com/legalnewsroom/tax-law/b/newsheadlines/archive/2017/10/04/inventor-tells-9...>

[SweetieJean]

<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3921368-about-1099-misc-for-research-patents">https://ttlc.intuit....>

[pne]

It was reported in Box 2 "royalties".  It is from MIT.  They share patent rights with the inventor.  I have a copy of a letter from IRS that says such "patent right" payments from licensing can be treated as capital gains.  The money is paid from licensing out by MIT.  I have not sold any such "rights"

[pne]

I made a mistake, it was reported in Box 3 "other income"  ALSO, I have found the IRS ref that says it can be reported as a capital gain.  Too long to copy.  On Internet it has URL: <NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM. August 8, 2002. Number: xxxxxxxxx>.  I want to efile.  So I don't think I can add attachments of my own, and can't ignore the 1099-misc.  I have repeatedly started from the 1099-misc and answered questions which inevitably end up with it going through a Schedule C and ending on line 12 of  IRS 1040, which treats it as business income.  How can I end with it going to Schedule D where it should end as a capital gain?.

[pne]

The URL I cited should be: NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM. August 8, 2002. Number: xxxxxxxxx.

[pne]

Each time I send the URL, the last part gets changed to  xxxxxxxxx from xxxxxxxxx !

[pne]

It happened again.  The number should be xxxxxxxxx.  Perhaps when searching better to leave the number off?

[pne]

Number still not traveling!

[Hal_Al]

You can use a work around to put it on line 21 (other income ) of form 1040.

TurboTax (TT) will aggressively steers you to self employment, even if the amount is in box 3. But, you can force TT to treat it as other income.
At the screen "Does one of these uncommon situations apply", select "None of these apply". If you answer all 3 of the next questions no; TT treats it as other income rather than self employment.
• No, didn't involve work like main job
• Only got the income in 2016
• It didn't involve an intent to earn money

This will put it on line 21 of form 1040, correctly identified as “other income from box 3 of 1099-Misc”

Lying to TurboTax to get it to do what you want does not constitute lying to the IRS.

Next make a negative entry on line 21 by following choice #4 in the answer, below.  For description say something like 1099-Misc patent income reported as capital gain per  section 1235 of the Internal Revenue Code

[Hal_Al]

Whether  the income should  be treated as a capital gain depends on the details. See https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html

If you are correct, you have received an erroneous 1099-Misc. If you received an erroneous 1099-Misc, you have several choices:

1. Ideally, you get a corrected 1099-misc from the payer

2. Don't report it on your return. Attach a copy of the 1099 and a statement explaining the circumstances. You can't e-file. From the IRS instructions for form 1099-Misc: Form 1099-MISC incorrect? If this form is incorrect or has been issued in error, contact the payer. If you cannot get this form corrected, attach an explanation to your tax return and report your income correctly.

3. Report the Income on schedule C and take a deduction under other expenses, call it something like "1099-Misc income reported on Schedule D"

4. Report the income as misc line 21 income (enter in TurboTax at the 1099-Misc screen) .  Then enter a line 21 deduction, for the same amount.  In TurboTax (TT), enter at:
- Federal Taxes tab
 - Wages & Income
- “I’ll choose what I work on” Button
Scroll down to:
-Less Common Income
      -Misc Income, 1099-A, 1099-C
       - On the next screen, choose – Other reportable income - Enter the number with a minus sign (-) in front. Briefly explain at description.                                                                                                                                         Separately report the income  as a capital asset sale

5. Ignore the 1099, report the income as capital asset sale and hope you can explain it away when & if the IRS contacts you.

[Carl]

Don't ignore the 1099-MISC.

• Reporting 1099-MISC (box 3 or box 7) that is not self-employment income

Under the Wages & Income tab (or Personal Income tab) scroll down to Other Common Income and elect to start/update Income from form 1099-MISC. Then click YES to indicate you have a 1099-MISC.

Enter the 1099-MISC exactly as printed, and then Continue.

Enter the reason you got this money – be it scholarship, bonus, streaking butt naked across the 50 yard line of the super bowl, whatever. Then continue. Do NOT use the words "rental income" or "royalty income". Otherwise, you can expect an audit since rental income is reported in box 1, and royalty income in box 2.

Select None of these apply, then Continue.

Select No, it didn’t involve work….. and Continue.

Select ONLY the tax year for which this specific 1099-MISC was issued. Do not select the year that you received the 1099. Select the year for which the 1099-MISC was issued. Select no other year. Then Continue.

Select No, it didn’t involve an intent to earn money, then Continue.

Select NO, then Continue.

Click the DONE button, and that does it.

[Jack27]

"If you are correct, you have received an erroneous 1099-Misc."

I don't believe this is true, and it makes the rest of the post confusing in terms of trying to determine the best solution.

As Hal_Al points out in another post, Section 1235 of the Internal Revenue Code makes clear that if an inventor has transferred their patent rights to a third party, such as their employer, they can claim income from that patent as a capital gain. In order to make this easier, companies, universities, etc. report this income in box 3 of the 1099-MISC. You can find various university websites that say this and I doubt they are all creating erroneous 1099-MISC forms.

Although the intent is to make this income easier to claim as a capital gain, I still have no idea of the best way to do it if I want to use TurboTax.