"negative" other income not enough to offset 1099-MISC

Forum|Forum|2 years ago
May 24, 2024
2 replies
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I received 1099-MISC for IP royalties but there's a case that IP royalties can be entered as capital gains (SEC 1235). Of course, since a 1099-MISC was received, it must be entered, which I'll do. The amount is in box 2 "Royalties". This generates about 41% federal tax.

The trick I saw online is to go to "Other income" (under "Less common income >Miscellaneous income 1099-A, 1099-C") and enter a NEGATIVE amount as other income to offset the 1099-MISC and explain that is the amount will be reported as capital gains as per SEC 1235. THEN, I should enter the whole royalties amount as capital gains.

The problem is that entering a negative amount in Other Income that is equal (but negative) to the the 1099-MISC amount does NOT completely remove its effect. For example is $100,000 is entered in 1099-MISC box 2, then it would require a negative amount of -110,858 in Other income to completely offset it but that would attract unwanted attention and would be awkward to explain. Just entering -100,000 in Other income will help but not completely removing the effect of the 1099-MISC entry.

Is that a bug in TurboTax? Why doesn't an equal but negative entry in Other Income completely offset (remove) the effect of a 1099-MISC entry? If I hypothetically try the same thing but with a 1099-DIV entry instead of a 1099-MISC entry, an equal but negative entry in Other Income DOES completely offset the 1099-DIV amount (it works properly then). Why does it NOT work when it comes to 1099-MISC? Is that a bug? How to make it work?

rjs

Level 15

It works for me, so you must have entered it differently than I did. But we can't see your tax return and you haven't given enough detail about how you entered the 1099-MISC and the offsetting entry, and how you determined that the income is not completely offset. What specific form and line are you looking at to determine that? Are you looking at whether the income is completely offset before or after you enter the capital gain? What line of Schedule 1 is the negative other income on? Is it the full amount that you entered?

Did you enter the 1099-MISC as royalty income on Schedule E or as business income on Schedule C? If it's for intellectual property that you own but did not create yourself, it should go on Schedule E.

Where do you see that IP royalties can be reported as capital gains? That's news to me. IRC Section 1235 is for sale or exchange of patents. Royalties are not a sale or exchange. Can you post a link to a source for treating royalties as capital gains?

BB_0Author

Level 2

I entered 100k as 1099-MISC box 3. That created a Sch E so that's all correct and up and up.

However, royalties from long term IP (university owns old IP and started give some quarterly royalties as those have started to be generated from some licensing) have been (successfully) argued that they can be entered as capital gains, e.g. https://www.colorado.edu/venturepartners/sites/default/files/attached-files/2003pwcupdate.pdf

Also, INITUIT TurboTax has a thread on how to handle this:

https://ttlc.intuit.com/community/taxes/discussion/how-do-i-report-patent-income-as-a-capital-gain-when-it-has-been-reported-on-a-1099-misc/00/692318/page/2

I followed that of course. The point is it didn't work. I noted the baseline of my taxes before entering any of the royalties on the 1099-MISC. Call that baseline taxes. Then, as I entered $100k as 1099-MISC box 3, I watched how much the taxes go up (by about ~$40.5k) and noted that (it also properly created Sch E). Then I entered as "Other income" the same amount but as a negative number i.e. -100k), but the taxes did NOT fully return back to baseline (about $4k of the $40.5k rise remained outstanding). In order to get them to return fully back to baseline, I would need to enter -$101,808 to offset the $100,000 in as 1099-MISC in box 3. If, alternatively, I redo the whole thing pretending it was a 1099-DIV and enter $100k there and -$100k as "Other income", it works and they cancel perfectly. Not sure why 1099-MISC box 3 is taxed differently.

(To complete the picture for you when I do the above, I get in Sch 1 a $100k on line 5, -$100k on lines 8z and 9, and $0 on line 10, and I get in Sch E a $100k on lines 4, 21, 23b, 24, and 26)

So, the gist is I need to enter 1099-MISC because it was issued so I need it entered in and have a Sch E generated. Then I need to cancel it out by an equal but negative amount under other income and explain that royalties are to be entered as capital gains in accordance with precedent and as per to Sec 1235. By the way, when entered as capital gains, the 100k only generate a tax rise of ~$21.5k. That's MUCH better than the ~$41k tax rise from entering as 1099-MISC box 3.

Bsch4477

Level 15

Enter the $100,000 on 1099-Misc in box 3. On another 1099-misc enter the same amount in box 3 as a negative and in the “Who paid you “ box enter “zeroing IP in 1099-misc to report as capital gains.”

BB_0Author

Level 2

Unfortunately, a negative amount for 1099-MISC box 3 does NOT have any effect and therefore would not do the trick. Only a positive amount will be taken further to inquire that it was royalties or not (on next screen) and then make it over into Sch E. So the negative amount doesn't work. The potential of entering something negative into Sch E itself (e.g. as expenses, etc) is not allowed by TurboTax (only positive amounts can be entered). Negative amount only works as "Other reportable income" under the bottom-most item in TurboTax ("Less Common Income >Miscellaneous Income 1099-A, 1099-C >Other reportable income". And there an equal but negative amount does not fully offset the entry in 1099-MISC box 3 (it would if the entry were in Box 1 [rent] or if the entry were a 1099-DIV altogether). Strange.

Bsch4477

Level 15

When I enter an amount in box 3 there is no association with Sch E. That only happens if I enter the amount in box 2. Entering the same negative amount in another 1099-misc box 3 cancels the other income out.