Royalties and 199A

Forum|Forum|6 years ago
December 7, 2019
1 reply
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Taxpayer receives royalties from 2 different oil companies.

1) 1099Misc Box 2 Royalties. This has been reported on Sch E.

2) 1099Misc Box 7 Non-Emp Comp: company treats recipient as working interest and could be responsible for losses incurred. This has been reported on Sch C.

Both are passive to taxpayer. Are either of these eligible for 199A even though no trade or business dealings or are they merely investments? Both were inherited several years ago.

ProSeries Professional

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Best answer by PhoebeRoberts

Working interests held directly (as opposed to through a liability-limiting entity) are statutorily nonpassive. Royalties are statutorily portfolio (which is also not passive income).

The royalties are clearly not QBI, because portfolio income isn't QBI. I'd sign a return taking the position that the working interests were QBI - they're enough of a ToB to give rise to SE tax, after all.

PhoebeRoberts

Answer

Intuit Community Champion

Working interests held directly (as opposed to through a liability-limiting entity) are statutorily nonpassive. Royalties are statutorily portfolio (which is also not passive income).

The royalties are clearly not QBI, because portfolio income isn't QBI. I'd sign a return taking the position that the working interests were QBI - they're enough of a ToB to give rise to SE tax, after all.

PhoebeRoberts

Intuit Community Champion

You said:
Thank you for your answer.

So, a 1099Misc box 7 does require SE tax even though they have nothing to do with the oil company?

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