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Royalties and 199A

hmosbergea
Level 3

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.

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PhoebeRoberts
Level 9
Level 9

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.

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PhoebeRoberts
Level 9
Level 9

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.

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PhoebeRoberts
Level 9
Level 9
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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PhoebeRoberts
Level 9
Level 9
It's not that it's reported in Box 7. It's that working interests are by definition subject to SE tax, exactly as a general partnership interest would be. (And a working interest is basically equivalent to a GP interest in the well.)

There's a really old court case where a little old lady who inherited her interest was found to be not subject to SE tax. But if you're going to take the position that it's not a ToB for SE tax, it's hard to also be arguing that it's a ToB for QBI.
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