Here is an excerpt from Chapter 12 of IRS Publication 535: https://www.irs.gov/pub/irs-pdf/p535.pdf
"Determining your qualified trades or businesses. Your qualified trades and businesses include your section 162 trades or businesses, other than trades or businesses conducted through a C corporation, W-2 wages earned as an employee, and specified service trades or businesses. In general, to be engaged in a trade or business, you must be involved in the activity with continuity and regularity and your primary purpose for engaging in the activity must be for income or profit. If you own an interest in a pass-through entity, the trade or business determination is made at that entity's level."
Typically, royalty income is not considered trade or business income.
If the Sch E Royalties are not related to the creator of a performing artist royalty, NO - the income is not considered a Service, Trade or Business.
If the Royalties are related to the actor or song writer that created the Show, Commercial, Music or other performing artist income streat, they should be reported on Sch C and would be eligable QBI, though catagorized as a SSTB.
Page 229 of the Final Regulations, item (v) Example 5 seems to contradict itself (or simply lacks in clarity). It references a singer / songwriter as a performing artist, of an SSTB, but then concludes the royalties received "for the song are not eligable for a deduction under section 199A".? I beleive they would be, if the taxpayer is under the SSTB phase out floor, and maybe if in the SSTB phase our range.
I think you'd want to ask two questions in order to determine whether royalties produce qualified business income and a Section 199A deduction.
Question 1: Is the activity producing royalties a trade or business?
First, you'd want to figure out whether a Section 162 trade or business activity creates the royalties. E.g., some of you know I wrote Quicken for Dummies and QuickBooks for Dummies. Those books produced royalties. Further, I think it's pretty clear those royalties stemmed from a trade or business. (My writing showed regularity, continuity and a profit motive... the requirements laid out in Groetzinger.)
But some people receiving royalties for something like writing a book don't have a trade or business... One might assume when a former U.S. president writes his memoirs that doesn't count as a trade or business. (President Eisenhower probably wasn't in the business of writing books, for example.)
Note: If royalties come from a trade or business, I think they should be reported on Schedule C and not on Schedule E...
Question #2: Is the writing or composing activity a "specified service trade or business?"
The second question would be whether someone's writing, due to their taxable income and the nature of the writing, counts as a specified service trade or business because the writing connects to a performance. The final regs summary says this on page 84, "To the extent that a writer is paid for written material, such as a song or screenplay, that is integral to the creation of the performing arts, the writer is performing services in the field of performing arts." That seems pretty clear.
E.g., if someone writes a novel and earns $1 million in royalties, the writer has qualified business income and potentially gets the Section 199A deduction. (A novel is not a performance.) If someone writes a movie script and earns $1 million, the writer doesn't have qualified business income.