Royalties from a patent Sch C or E?

[nwtaxlady]

I have a client that is a professor at an University and has some patents. He received a 1099 for Royalties from the University.
Would this be Sch C income and anything else I need to be aware of?

[TAXNJ]

see TTB start at 5-19 as applies to your scenario:

“Royalties. Royalties may be received for the performance of personal services or for the ownership of an intangible asset. Royalties are taxable as ordinary income and are generally reported on Schedule C (Form 1040) or Part I of Schedule E (Form 1040). For information about royalties from oil, gas, or mineral properties, see Schedule E (Form 1040) Supplemental Income and Loss, Tab 7 .

• When the producer or creator of a musical composition, literary work, or work of art receives royalty income in connection with a copyright on that product, the royalty arises from the performance of services and is reported on Schedule C (Form 1040) as self-employment income and is subject to self-employment tax.
• Royalty income received by someone who purchases the copyright of a musical composition or literary work as an investment is reported on Schedule E (Form 1040) and is not subject to self-employment tax.
• Payments for the right to use a person’s image or likeness are not income from services, even if described as royalties….
• …….”

[Lion]

Are patents and other intellectual property covered in your client's contract with his University employer? Who owns the patent, your client or the University? Were the royalties for the use of the patent or for the sale/transfer of the patent from your client to the university. I have lots of questions but no answers.

[ATSMAN]

I have a client also a Professor and receives a small royalty for a text book or instruction manual he wrote for some engineering project. He is NOT self employed so we report it on Sch E.

[nwtaxlady]

Are patents and other intellectual property covered in your client's contract with his University employer? Who owns the patent, your client or the University? Were the royalties for the use of the patent or for the sale/transfer of the patent from your client to the university. I have lots of questions but no answers.

The patent was filed through the University and the University owns the patent and has an agreement to share or give the taxpayer a percentage of the Royalties.
This is the first year the client has received Royalties from the University. So would this be reported on Sch C or Sch E?

[terryats]

It is impossible to give you a definite answer, as only you know all the facts, and each case could be different. Here is an excellent article to read so you with all the facts can decide where to put the royalties:

https://www.thetaxadviser.com/issues/2013/dec/kelley-dec2013.html

[nwtaxlady]

The Royalties are reported on Sch C since it was self created. Does this qualify for the QBI deduction? Remember, he is an employee(professor) at the University and filed the patents thru the University and gets a percentage of the Royalties. QBI deduction?

[terryats]

Yes. See link:

https://www.irs.gov/newsroom/facts-about-the-qualified-business-income-deduction

[nwtaxlady]

Yes. See link:

https://www.irs.gov/newsroom/facts-a...come-deduction

Looking at this link, does it mean that since he performed services as an employee that he does not qualify for the QBI? Since he was an employee and filed patent thru the University.
I am confused now. Ugh. please help.

[terryats]

If your clients income is on schedule C and subject.to tax, then it is qualified for QBI, if he meets all other qualifications. W2 wages are not qualified income for the QBI, and just because your client has W2 income will not disqualify his schedule C income, only his W2 income

[nwtaxlady]

If your clients income is on schedule C and subject.to tax, then it is qualified for QBI, if he meets all other qualifications. W2 wages are not qualified income for the QBI, and just because your client has W2 income will not disqualify his schedule C income, only his W2 income

Looking at that link under Qualified Trade or Business except #3. Services performed as an employee. This is where I get confused. He is an an employee when he filed for the patent with and works for the University. And he does have a W-2 for his wages and then on top of that is his Royalties being reported on Sch C. So does he not qualify for the QBI since he was an employee (royalties for patent) or is that referring to something completely separate?