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

[Bsch4477]

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. 

[BB_0]

@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).

[rjs]

@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.

[BB_0]

@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-w...)  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).

[rjs]

@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.

[BB_0]

@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 🙂

[rjs]

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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 🙂

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

[BB_0]

@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.