Contributed by: PhillipB, FreeTaxUSA Agent, Tax Pro
What is royalty income?
Royalties are payments for using someone else's property (like their work or land) or giving the property owner part of the income from it (like mining their land). Royalty income can be:
- a payment to a patent owner for use of a patent.
- a payment to a writer or musician for each book sale or each public performance of a work.
- a payment made by a producer of minerals, oil, or natural gas to the owner of the land or the owner of the mineral rights.
Most US royalty income is earned from mineral, or oil and gas extraction by land or mineral rights owners. Generally, royalty income is reported on Schedule E; however, in some cases, you must determine whether it should instead be reported as self-employment income on Schedule C.
How do I report passive royalty income on a tax return?
Schedule E is where you report royalty income that is not from an active trade or business. This is true if you own land and receive royalties from minerals or oil and gas producers, or if you receive royalty income from intellectual property – such as a creative work of art or technical invention or innovation – that was not produced as part of a trade or business.
To report royalty income on Schedule E, follow this menu path: Income > Uncommon Income > Royalty Income (Schedule E).
How do I report royalty income from self-employment on a tax return?
Royalty income from active work in a trade or business should be reported on Schedule C as self-employment income. This usually will only include royalty income from creative intellectual properties, but royalty income from resources may be self-employment income if the landowner is also involved in the resource extraction business on their land.
Creators of intellectual property will always report their royalty income as self-employment income if they were in the trade or business of profiting from their intellectual property when it was created.
For example, if a college professor writes a textbook in his free time and it is published, he will not have self-employment income if his activity ends with the one-time authorship of the textbook. However, if the professor continues working on new editions of the textbook or actively promotes the book, the activity will be considered a trade or business, and the royalty income will need to be reported on Schedule C.
To report royalty income from self-employment, follow this menu path: Income > Business Income (Schedule C).
For more information about royalty income, see the current Schedule E instructions.