Where to record expenses for business that owns intellectual property/royalties

[dommett01]

We have an LLC that it's only source of income is royalties for some engineering design. We receive a 1099-Misc that shows the royalty we receive from the business that uses our design. Rarely we make a small modification to the design so we have small expenses. We have always claimed the royalties as passive income. But if I enter my expenses (like accounting software or expenses such as supplies needed for modifications) it wants to show having a loss. Can't I just reduce the passive royalty income? That is what an accountant has done in the past but I can't figure out how to enter expenses/deductions in TurboTax Business (Desktop) without it showing as a loss of income (meaning showing up in box 1 of our K-1s) and not just a reduction in royalties. In the accountant's previous year's 1065, he listed the expenses to royalties  on a rental expenses/schedule. 

[PatriciaV · Accepted solution]

In TurboTax Business, you will need to set up the Royalty activity first under Business Info >> About Your Business. Be sure to check the box for "We rent real estate to others" as one of your business activities. Continue through the interview to the page "Rental Real Estate Property Summary." 

Add a property (or continue). On the Property Type and Location page, use your business address for the activity and choose "6 Royalties." 

Then under Federal Taxes, go to Rental Real Estate and edit that activity. (Be aware that calling this a "Rental Real Estate" activity is a TurboTax convention and won't affect how it is reported to the IRS.)

Use your business address for the activity. Do not enter anything for the "number of days rented."

Enter your income from Form 1099-MISC under "Real Estate Income" and your related expenses under the provided expense categories.

To check that this is reported properly, click the Forms icon in the TurboTax header. Look for "8825 Worksheet" in the left column and click the form name to open it in the large window. Review the information and confirm no boxes are highlighted in red.

Click Step-by-Step in the header to return to the main screens.

[dommett01]

This got me pretty close, however, if I enter our Royalties and expenses thru the real estate activity (yes I marked it 6-Royalties), the values come out on my K1 in box 2 - Net Real Estate Income instead of Box 7 - Royalties. My accountant has previously  had the Royalties minus expenses listed on Box 7 of the K1. (If I switch up and list my income under Royalties but leave the expenses in the real estate section, it ultimately doesn't reduce my royalties on my K1.

[PatriciaV]

Instead of entering this under Real Estate, you can manually enter the net royalty income using Forms Mode.

1. Click the Forms icon in the TurboTax header.
2. Open Form 1065 p5-6.
3. On Line 7, enter the net royalty income in the yellow box under "Direct Entry."
4. This income will be allocated to the partners on Schedule K-1 Line 7.

[dommett]

In TurboTax Business Desktop 2025 - there is no longer an option to tick "We rent real estate" in the About our Business section which would trigger an 8825 Form for us to enter expenses against our Royalty income. How do I do that in 2025's desktop software?

[ThomasM125]

When you set up a business in TurboTax, you are asked to select the type of business you have, on the screen that says Select all that applies to your Business. One of the responses to that question is We rent real estate to others. 

Also, when you click on the Federal Taxes menu tab, you will see the option for Rental Real Estate. Once you choose the Rental Real Estate option you will see the menu I referenced above where you can indicate that you rent real estate. Once you do that, your rental entries will appear on Form 8825.

[PatriciaV]

How did you report the royalty income and expenses last year? Did you enter it manually on Form 1065? Or did you use the Rental Real Estate option?

To report Royalties correctly on Form 1065 pg 5 Line 7 and Schedule K-1 Line 7, enter the royalty income under Federal Taxes >> Income >> Other Income >> Royalty Income.

Any expenses relating to this income would be included as Deductions >> Business Expenses under an appropriate category.

[EliBaker]

Hello,

We have a new game company and our only source of income is from Royalties.

When using Turbo tax if we enter our expenses it shows as a loss instead of taking a deduction against the royalties.  How do we deduct these expenses against the royalties instead of showing a loss. It looks like we are supposed to enter them on schedule K  line 13 I (deductions royalty income from K-1s).  When I click on this cell it says this field is currently calculated.  Where on the form do I go to have it calculated?  Or should I just override it?

[EliBaker]

Hello, 

We have a new game company and our only income is from royalties.  How do we deduct our expenses against these royalties?  It looks like it is on line 13-I  of the schedule K.  But how do you actually enter them.  When I click there it says I will override the data.  So where on the form do I enter it so it won't have to be over written?

Thank you!

[PatriciaV]

Royalty income from your business would be entered in TurboTax Business under Federal Taxes >> Income >> Other Income >> Royalty Income. This entry is reported on Form 1065 pg5-6 Schedule K Line 7 and is included in the total income for your partnership.

Business Expenses are entered under Federal Taxes >> Deductions >> Business Expenses. These entries are reported on Form 1065 pg1-4 under Deductions or Form 1065 p5-6 Schedule K Deductions.

While the expenses may appear on Schedule K-1 Part III Line 1 (Ordinary business income/loss) and royalty income on Line 7, the net income to the partners is calculated using both lines. This is the correct treatment because you are in the business of generating royalties. Other companies that own royalty property (or intangible assets) would deduct expenses directly from the royalty income.

Schedule K Line 13(e)(I) Deductions - Royalty income from K-1s reports income that flows from a K-1 provided by an investment held by your company. This line is not used to report your business activity.