Would artistic royalties, like book royalties, be considered QBI?

[taxed2max]

Client produced a game, originally filed a sch C for the year he worked on it.  It has been selling online and he annually gets some decent royalty payments now.  What are the thoughts on whether this would qualify for QBI?

[itonewbie · Accepted solution]

§199A does not change the existing code sections and regulations that govern the taxation or characterization of income.  One should, therefore, look back to the existing rules to determine the character of the income in conjunction with whether it arises from a qualified trade or business.

Question is whether your client was indeed in the trade or business of producing games.  It was long-held that royalty income generated from sporadic activities engaged in by a taxpayer is not income arising from a trade or business and, hence, should not be subject to SE-tax.  Another question is whether your client owns and controls the intellectual rights to the game(s); if not, it may well be that the royalty income is compensation for services.  If your client was, indeed, in the trade or business of producing games, there may be sufficient nexus between the royalty income, albeit received in a later year) and the trade and business (which is no longer being operated as such) to be considered income arising from a qualified trade or business.

You will need to review the facts and circumstances as well as terms and conditions of the agreement/contract that gave rise to the royalty income to determine whether the income is eligible for QBI deduction.

[Strongsilence-CPA]

My client has been in product development for years, mostly different types of small tools. She goes 3-5 years with no income then collect license income which can last for 10+ years. Then the next cycle of losses and income starts anew.

This is a TOB based on the facts.

LC doesn't have a link for fixed assets, home office form or SE health insurance form to deduct against E Royalty income. 

So I wonder about putting the Royalties on Schedule C. The 1099 lists Royalties in Box 2 so the matching program would catch it right?

Any thoughts are appreciated.

[sjrcpa]

If it's a trade or business i would put it on Schedule C.

I have several authors as clients and that's where I put their income and expenses.

[Strongsilence-CPA]

Thanks. On the royalty income related to the TOB. Does that have to go to Schedule E? If is reported on 1099-Misc Box 2.  

If it stays on E, the SE tax doesn't result.