Hal_Al and Carl have explained above how to account for the 1099-Misc by first putting the income in as reported on the form for computer matching, then go to "Other reportable income" and put in a negative number to subtract that income out and put in the description somehow saying reported in capital gains sec 1235.
Once you have accounted for the 1099-Misc and then subtracted it, then go to "Stocks, Bonds..." area and enter a long-term sale of "other" and describe as "1235 Patent sale" to get the income on schedule D.
Had you not gotten a 1099 then you could have just skipped to inputting a long term sale.
See this:
<a rel="nofollow" target="_blank" href="https://www.lexisnexis.com/legalnewsroom/tax-law/b/newsheadlines/archive/2017/10/04/inventor-tells-9th-circ-ip-royalties-were-capital-gains.aspx?Redirected=true">https://www.lexisnexis.com/legalnewsroom/tax-law/b/newsheadlines/archive/2017/10/04/inventor-tells-9th-circ-ip-royalties-were-capital-gains.aspx?Redirected=true</a>
<a rel="nofollow" target="_blank" href="https://ttlc.intuit.com/questions/3921368-about-1099-misc-for-research-patents">https://ttlc.intuit.com/questions/3921368-about-1099-misc-for-research-patents</a>
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"
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?.
The URL I cited should be: NATIONAL OFFICE TECHNICAL ADVICE MEMORANDUM. August 8, 2002. Number: xxxxxxxxx.
Each time I send the URL, the last part gets changed to xxxxxxxxx from xxxxxxxxx !
It happened again. The number should be xxxxxxxxx. Perhaps when searching better to leave the number off?
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
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.
Don't ignore the 1099-MISC.
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.
"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.
I have the same issue regarding patent income (although my 1099-MISC has the income in box 2). TT is currently pushing me into business income and doesn't even give me the option to consider 'uncommon situations'. How do I get this to capital gains?
Box 2 on the 1099-MISC are income from royalties and should be reported on Schedule E, not as capital gains. To report, follow these steps.
Please help. I used your methodology for entering royalty income for a patent. However, this method basically enters the amount as ordinary income at a high rate of taxation. Under IRS Code 1235, patent income is qualified for categorization as Long Term Capital Gains so is subject to a MAXIMUM of 20% taxation based on income. It is essential that I get the benefit of the 20% taxation rather than the higher rate.
How can I do this within Turbo Tax?
The method you suggested calculates the tax in the exact same manner as if I enter the 1099 under business income with the other 1099s for my self employment income that is outside of my regular job.
Any suggestions that you can make would be most appreciated! Thanks.
Hal_Al and Carl have explained above how to account for the 1099-Misc by first putting the income in as reported on the form for computer matching, then go to "Other reportable income" and put in a negative number to subtract that income out and put in the description somehow saying reported in capital gains sec 1235.
Once you have accounted for the 1099-Misc and then subtracted it, then go to "Stocks, Bonds..." area and enter a long-term sale of "other" and describe as "1235 Patent sale" to get the income on schedule D.
Had you not gotten a 1099 then you could have just skipped to inputting a long term sale.
DMarkM1, related to same question about patent royalties under 1235 reported on 1099-Misc; when I input 1099 information in TT it requires me to designate it as investment income or self-employment income. In one case it asks for location of rental property and starts Schedule E and other it starts Schedule C, both of which are incorrect and triggers unnecessary/wrong paperwork and potentially other taxes. I understand the concept of adding and subtraction out in other income, but I can't find the right path in software to do this. Can you clarify on how to add in TT so that 1099-misc information is properly "computer checked". What is required for correct computer check. I will then add the income on schedule D per code 1235. If I manually do this on line 21 will it be correctly computer checked?
Please use this link from the Small Business association to report your patent royalty income. it would be reported as Schedule E income. when you begin the section, it will ask you if this is rental income or royalty income. You will check royalty income. Then a pop up will occur asking you the type of royalty it is, Indicate patent royalty. You do not need to enter an address and you can move on to the next screen to make your entries,
If you need to report as a capital gain, you will need to do the step I listed above and then:
Thanks DaveF1006, your software steps explanation is clear. One follow-up question, will generating Schedule E (even though subtracted out in other income) trigger additional self-employment taxes? Since I was fully employed, me and my employer have already paid employment taxes. Will Turbo Tax know this and will not trigger addition self-employment taxes.
You should not owe self-employment tax on this income. The IRS makes an important distinction between active and inactive employment.
If you are not otherwise engaged in the trade in which you are generating royalties, then you don't owe self-employment tax on the royalties. This is passive income, like dividends or interest on investments.
A writer who collects royalties from a book written five years ago, but who is not earning any money from the profession in the current year, is earning passive income.
Thanks JohnB5677 and Mark. I followed your instructions (Schedule E income then subtract out same amount in other reportable income section). However the tax owed increased a significant amount! My guess is that the the subtracted out income was treated as a "loss" and there was some income limit to amount of loss allowed to be applied. It does not make sense that the tax should be higher. I did add the royalty gain to schedule D as long-term gain prior to adding the schedule E information. I did this before submitting my question and getting your instructions. Would the order entered make a difference? If so, I can delete the schedule D info and then add it back. Any advice on how to effectively add this income as LT gain only? Since I did it this way initially (without schedule E), I know what the effective tax balance should be. I was surprised the tax owed increased.
I figured out that they royalty income was being double counted (royalty sched E, and capital gains per code 1235). This increased investment income tax since number was incorrectly high. I found this in form 8960. I put negative number of royalty amount in line 7 to correct double counting. This generates appropriate tax. Is this an acceptable way of generating correct answer? I don't want to inadvertently generate a flag. Please advise.