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

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?

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.” 

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.

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.

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. 

@BB_0 

As I said earlier, I cannot reproduce your problem. When I try it, the negative other income exactly offsets the Schedule E income. I think there must be some side effect of the Schedule E income that is affecting something else in your tax return (or you're doing something wrong when you answer the Schedule E questions). Let's try to pin it down. You have to look at specific lines on Form 1040 and Schedule 1.

What line of Form 1040 are you calling the "baseline taxes"? I would think you would be looking at line 16.

Before you look at the tax, you should look at the income amounts, either total income on Form 1040 line 9, or taxable income on Form 1040 line 15. Do those two lines go back to the original amount after you enter the 1099-MISC and the negative other income? If so, but the tax on line 16 does not go back to the original amount, then we have to dig into the tax calculation.

Now look at Schedule 1. Does Schedule 1 have $100,000 on line 5 and -$100,000 on line 8z? If the -$100,000 is not on line 8z, what line of Schedule 1 is it on?

Do you have any other Schedule E income besides the $100,000 of royalties?

Do you have any other entries in Part I of Schedule 1 besides lines 5 and 8z? If so, which lines, and what amounts?

Are you using TurboTax Online or the CD/Download TurboTax software?

Based on your answers to these questions either we will see what's going on, or we will investigate further.

Thank you for trying to help me by combing through this. I put your questions below and interlaced my answers.

Q: What line of Form 1040 are you calling the "baseline taxes"? I would think you would be looking at line 16.
A: I am calling baseline as the net taxes TurboTax is showing that I owe BEFORE I enter the $100k and -$100k. So it would be what would land on Line 37 of Form 1040 if I conclude my filing BEFORE I enter the $100k and -$100k.    The idea is I simply note what that amount is (in TurboTax screen) AND I WOULD EXPECT TO RETURN BACK TO IT after I enter the $100k and the -$100k.  Unfortunately, that is NOT the case.   I return to the original taxes I owe PLUS ~$4k, so the $100k and -$100k do NOT quite cancel out and what ends up on Line 37 Form 1040 is about $4k more than what it was before entering the $100k and -$100k.

Q: Before you look at the tax, you should look at the income amounts, either total income on Form 1040 line 9, or taxable income on Form 1040 line 15. Do those two lines go back to the original amount after you enter the 1099-MISC and the negative other income? If so, but the tax on line 16 does not go back to the original amount, then we have to dig into the tax calculation.

A: This was a good exercise –  I generated/saved Form 1040 PDF without entering the $100k and the -$100k.  Then I generated/saved it again after entering the $100k and -$100k.
The amounts on Lines 9, 15, and 16 of Form 1040 all match before and after.  IN FACT, ALL Lines 1 through 22 of Form 1040 remain the same.  Line 23 is different: it was $3,112 before vs $6,912 after.  As a consequence, Line 24 is also up by the same difference.  Lines 25 through 36 all remain the same.  Line 37 is up (as explained above) by almost $4k ($3974 to be exact)!

Q: Now look at Schedule 1. Does Schedule 1 have $100,000 on line 5 and -$100,000 on line 8z? If the -$100,000 is not on line 8z, what line of Schedule 1 is it on?
A: Schedule 1 (which is nonexistent before entering the $100k and -$100k and only exists afterwards) shows a $100k on Line 5 and -$100k on both Lines 8z and 9.  ALL OTHER LINES (Part I & all of PART II) ARE EMPTY.

Q: Do you have any other Schedule E income besides the $100,000 of royalties?
A: No other income on Schedule E.  This is further affirmed that there’s no Schedule E in my filing before entering the $100k and -$100k so it gets born after I enter the $100k the resulting Schedule E has $100k on Lines 4, 21, 23b, 24, and 26.

Q: Do you have any other entries in Part I of Schedule 1 besides lines 5 and 8z? If so, which lines, and what amounts?
A: As per above, Part I of Schedule 1 has $100k on Line 5 and -$100k on Lines 8z and Line 9 (obviously Line 9 is just the sum of Lines 8a through 8z).  All other lines of Part I of Schedule 1 are empty.  The enirety of Part II of Schedule 1 is all empty.

Q: Are you using TurboTax Online or the CD/Download TurboTax software?
A: I am using a downloaded TurboTax Deluxe.

On my end, entering an amount in box 3 that is equal to that in box 2 but negative does cancel the amount (as you indicated) but there's a net picked up tax amount (in the example I have a net +$4k taxes is picked up when I enter $100k in box 2 and -$100k in box 3.  It's strange since the 1099-MISC itself goes to 0 but not the net taxes.  This is much like what I get when I enter $100k in box 2, nothing in box 3, and then -$100k as "Other reportable income" – taxes do NOT get all canceled out and a net +$4k of taxes is picked up.   Also, entering something in box 3 when there wasn't any in the provided 1099-MISC may invite trouble – I prefer entering it as is and then canceling out through the route of entering an equal but negative amount in "Other reportable income" and explaining there, etc.  Unfortunately, it's not working.

Entering the amount in box 2 brings up Schedule E. Have you tried entering the same amount on line 19 as a deduction with the appropriate text explanation?

Looks like you have an extra 3800 on line 23 which comes from schedule 2 other taxes.  What line is it on schedule 2?  Do any other forms show up like a 8959 or 8960? You have to switch to Forms mode and find all the differences on ALL the forms and schedules.  

@BB_0 

Ignore the tax "meter" displayed in TurboTax. Look at the actual tax forms.

I have been assuming that you are working on a 2023 tax return. Is that correct?

So the negative other income does exactly offset the full amount of the 1099-MISC income. On Form 1040 your total income on line 9 and taxable income on line 15 do not increase. Even the tax on line 16 does not increase. The increase in the amount that you owe on line 37 is coming from somewhere else. There are two things we have to look at.

The amount on Form 1040 line 23 comes from Schedule 2. Which line (or lines) of Schedule 2 have increased or have new amounts? That should explain the increase in 1040 line 23. But we may have to try to figure out why entering the 1099-MISC causes the increased or new tax on Schedule 2.

Form 1040 line 23 increased by exactly $3,800, but line 37 increased by $3,974. So there's another $174 being added. Is there a $174 penalty on line 38? that gets added into line 37. It's a penalty for not having paid enough estimated tax during the year. That's probably a result of the additional $3,800 tax from Schedule 2.

There are two interspersed conversations going on here. When you reply to a post it would be help to reduce confusion if you say who you are replying to. The forum software does not indicate who you replied to (though it's usually clear from the context). If you type an @ sign you will get a pop-up list of the other participants and you can tag the appropriate person by selecting from the list.

You are right, when comparing the two tentative filings, one before entering the $100k and -$100k and one afterwards, the one afterwards picks up an additional $3800 in Schedule 2 Line "12  Net investment income tax. Attach Form 8960" where the amount goes from $1,033 (before entering the $100k and -$100k) to $4,833 (after entering the $100k and -$100k).

If I then go to Form 8960 to compare before entering $100k & -$100k vs afterwards, the one afterwards has $100k on both Lines 4a and Line 4c (the one before has those empty) and then Lines 8 and 12 and 16 are all raised relatively by $100k ($27,193 before entering $100k & -$100k versus $127,193 afterwards).  Then Line 17 is up from $1,033 to $4,833.  Other lines all match whether empty or filled (amounts in Lines 1, 2, 13, 14, and 15 all remain the same).

So, any ideas of why the +$100k makes it to Form 8960 and then have a +3,800 effect in Schedule 2, EVEN THOUGH the $100k is supposed to be canceled by the -$100k?!  The strange thing is that if the +$100k entry were 1099-DIV it does entirely get canceled by the -$100k entry – not the case unfortunately when the +$100k was a 1099-MISC.

I really appreciate your feedback and questions – they are are all spot on and I feel like we are onto something.

I take it you mean Line 19 of Schedule E – the issue is that TurboTax is NOT allowing to enter any negative amount anywhere.

@rjs 

Thank you.  And you are right it's from Schedule 2 which further points to differences in Form 8960.  I am pasting below the answer I gave in response to VolvoGirl, but I failed to use the @ to indicate that – will do that moving forward.  Thanks for the advise.

In addition to the pasted response below, to answer your question about the extra $174, yes it's a penalty on Line 38 of Form 1040 – the penalty was $187 on Line 38 before entering the $100k and it becomes $361 afterwards (an increase of $174).  So, the resulting increase, separate from the penalty is indeed $3800 which is the exact difference on Line 23 before and after.  Also, I'm using TurbTax Deluxe 2023 (all updates made to the application).

So, as you put it why is a 1099-MISC causing all those side effects?

----------- PASTED PREVIOUS ANSWER -------------

You would not enter the amount on line 19 as a negative number, right? It is a positive number added as an expense to cancel the positive royalty amount. 

@Bsch4477 

The only screen I get when I navigate Schedule E is whether I spent more than 750 hours in real estate or 50% of my time in real estate, and I answer none of the above.  There's no opportunity to enter an expense (plus will need an opportunity to type and explain it – I don't see the way).

@BB_0 

Now we know what's going on, and @Bsch4477 has the solution. His suggestion does work. You're just missing how to get there. There's still one mystery, but it's just academic at this point.

Royalty income on Schedule E is investment income, so it gets added to the total investment income on Form 8960 and increases the Net Investment Income Tax (NIIT) on Form 8960. But other income on Schedule 1 line 8z is not investment income, so the negative other income on that line reduces total income and taxable income on Form 1040, but it does not reduce investment income on Form 8960. So even though the negative other income cancels out the additional regular income tax, you still have the additional NIIT. The solution is to remove the other income entry and enter $100,000 as an expense on Schedule E. That will offset the investment income as well as the total income.

Here's how to enter the expense on Schedule E line 19 with a description. After answering "None of the above" to the question about 750 hours or 50% of your time, you get the Rental and Royalty Summary screen. On that screen, click the Edit button and continue through the screens. You will come to a screen that says "Review Your {xxx} Royalty Summary." On that screen click the Start button for Expenses. Continue through the expense screens (you don't have to enter anything) until you get to "Any Miscellaneous Expenses?" On that screen you can enter a description and the $100,000 as a positive amount. That will put it as an expense on Schedule E line 19 with the description that you entered, and will take it off of Form 8960.

What's a mystery to me is why the same thing didn't happen when you entered a 1099-DIV instead of a 1099-MISC. Dividends are also investment income. When I enter a 1099-DIV it also goes to Form 8960, just like the royalties. What box of the 1099-DIV did you enter the dividends in? Did you enter it in the same tax return, or did you try that in a return that did not have enough other investment income to hit the NIIT? But as I said, this is just of academic interest at this point. It doesn't affect the solution to your problem.

@rjs 

Ok, That worked. Thanks a 10^6 🙂 (to both you and @Bsch4477)

QUESTION: now that the effect 1099-MISC was completely canceled out in Schedule E, and taxes returned to baseline, I obviously still need to enter the earned $100k to get it taxes as long-term capital gain (citing precedent) and wanted your opinion on that.  The suggestion online (byDMarkM1 at 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)  was to enter the $100k under "Stocks, Bonds, ..." and then "Add more sales" and then pick other 1099-S and enter there, describing it as "Other" in the first pull-down menu, and then "something else" in the second pull down menu and then describing it as royalties on IP and then picking "Something other than a date" and then putting for "sold" the date the royalties, for proceeds the $ amount, and for cost basis $0.  Now the royalty payments were given out quarterly through the year (the 100k on 1099-MISC is their sum) so I can make such an entry under  "Stocks, Bonds, ..."  four times!  Does this all sound like the right path to you?  It feels awkward.

As for your other question (the mystery why entering them as 1099-DIV works) my "brain signals had crossed" when I alluded to that – what I meant to say is that reporting the $100k as 1099-DIV, either in both boxes 1a and 1b or just in box 2a give the desired tax result and the taxes only rise by $21,354 in response to the 100k entry.  There's no need to enter a -$100k (things are all set just by entering the 1099-DIV).

Circling back to the point above about where to enter the $100k after neutralizing it with 100k as Miscellaneous Expenses,  it seems a direct path to get the capital gain taxes is to go ahead enter the 100k as if there were a 1099-DIV (but it would be making it up so again feels awkward).

@BB_0 

Here's my opinion, but I'm not familiar with this treatment of royalty income so I'm no expert on how to report it.

What you outlined does seem like the right way to enter it. What probably makes it feel awkward is that it's not really a sale of an asset. You're forcing it onto a form that's not designed for it. But that's the only way to report it as capital gain. Yes, you can and should make four entries, each with the actual date that the payment was made.

How would you enter it as a 1099-DIV? Do you mean you would put it in box 2a? I wouldn't do that. It wouldn't look right, and it gives you no opportunity to enter a description.

@rjs 

Thanks a 10^6, again.  I'll do it as described, and I agree the 1099-DIV would be a made-up baseless way to do it with no opportunity to qualify the move and no form to support the entry.

You're really very helpful – very patient, attentive, detail-oriented, precise, and sensible, hence so very helpful:)

Kindest regards,

p.s. I may have a question later on about entering sales of founder stock and invoking Sec 1202 as a QSBS to avoid tax on the first $10MM.  But for now, a break 🙂

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@BB_0 wrote:

I may have a question later on about entering sales of founder stock and invoking Sec 1202 as a QSBS to avoid tax on the first $10MM.  But for now, a break 🙂

---

If you do, post it as a separate new question. Don't add it on to this thread.

@rjs 

Yes will do it as a separate question.

BTW, about the 1099-DIV hypothetical I wasn't confused after all.  Both things are true, meaning that (i) if the amount (e.g. $100k) where from a 1099-DIV (whether qualified dividends or capital gain) then entering it as such would do (only $21k taxes) and I'd be done and that (ii) if it's entered as a 1099-DIV and for the sake of argument an equal but negative amount is entered in "Other reportable income", it would cancel the 1099-DIV completely.   So, a 1099-DIV entry does behave different from a 1099-MISC entry.  The 1099-DIV doesn't generate Schedule E, so maybe therein lies the explanation?  Not sure.  But you alluded that it's a mystery.  If you want, I can (tomorrow) execute a hypothetical $100k as 1099-DIV and a -$100k as other reportable income and report to you what's on certain lines. It's academic of course, but ...

Thanks again.