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

[merzo]

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?

[VictoriaD75]

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.

• From the Federal menu on the left, choose Wages & Income
• Expand the menu for Rentals, Royalties, and Farm
• Click Start/Revisit next to Rental Properties and Royalties (Sch E)
• Answer Yes to Do you have any rental or royalty income and expenses in 2019 for property you own? Patents are included in intellectual property.
• Click None of the above on the Let's See if You're a Real Estate Professional and click Continue
• On the next screen, Is This a Rental Property or Royalty, choose Royalty property or payment
• Enter the information and click Continue
• When you come to the screen, What Type of Royalty Income?, choose Other Intangible (Patents, copyrights). Click Continue
• When you get to the Royalty Summary screen, click Start/Revisit next to Royalty Income to enter your 1099-MISC

[B711]

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.

[DMarkM1 · Accepted solution]

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.   

[47TGA34]

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?

[DaveF1006]

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:

1. Go to "Other reportable income" in the income and expense section and put in a negative number to subtract that income out and put in the description somehow saying reported in capital gains sec 1235. 
2. 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. 

[47TGA34]

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.

[JohnB5677]

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.

[47TGA34]

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.

[47TGA34]

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.

[Sid1820]

Hi everyone,  @Hal_Al , @DaveF1006 , @DMarkM1 , @Carl 

Thanks for your help in this topic.  Please could you guide me more how to report the royalty as a capital gain in the Stocks bonds section.  I am so confused. 

Once I click Stocks and Bonds under investment income, the first question is " Did you sell any investment in 2019 and once I select yes, it ask did I receive form 1099-B form.  I selected no, then list of options appear from second home to stocks and everything else. Which option do I need to select and also it ask for date sold.

Any help would be appreciated a lot.

Thanks.

[Carl]

Please could you guide me more how to report the royalty as a capital gain in the Stocks bonds section.

I haven't read thtough this entire thread prior to posting this. But "ROYALTY" income is *not* reported anywhere except on the SCH E in the Rental & Royalty Income (SCH E) section of the program. That's it. Period. End of story.

So if you have a 1099-MISC with income reported in box 2, the SCH E is the absolute only place you report it.

Note also that all income is only reported ***ONCE*** on a tax return. There are no exceptions.

[Sid1820]

Thanks Carl,

Appreciate your quick response.   Along with 1099-Misc I received, I also received a note describing section 1235 of the IRS that concluded royalty payments  were eligible for capital gain treatments.  I believe one member before me also reported a similar note in this thread and then I read many members in this thread describing reporting of royalty I099-Misc income and then equal subtraction, and eventual reporting in the bonds section as capital gain as schedule D so I am confused. 

[dreywing14]

Thank you for this thread. I'm trying to follow the suggestions but my situation is a little more complicated... the university who gave me the royalty money for patent income put it in box 3 instead of box 2 (as with other users on this thread) AND bundled the money with an honorarium that i received from them in the same tax year for a separate activity. Hence Box 3 includes both honorarium and patent royalties (which can be treated as capital gains). My understanding is that the honorarium should be treated as self-employment income (? - please correct if wrong); therefore, after entering my 1099, i'm not sure if I should STILL say "NO" to the three questions about "do one of these uncommon situations apply" to force it to treat the whole sum as ordinary income. How can I apply the strategy to use a negative entry to reconcile the income as sec 1235 income, while still keeping the honorarium as proper SE income? 

[hamivasan]

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