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.