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Category: Questions about Income

What are "royalties" and how are they reported?

"Royalties" can generally be described as payments you receive for the use of your property, that are based in some way on the number of units sold.

The two types of royalties most commonly encountered are

  • (1) royalties for the use of copyrights, trademarks, and patents, and
  • (2) royalties from the extraction of oil, gas, or minerals from your property.

However, other types of royalties are possible, such as those paid for the use of a name, the sale of products using certain proprietary processes, etc. In any case, income and deductions related to your royalties are generally reported on Schedule E, Supplemental Income and Loss.

However, if you are in business as a self-employed artist, author, photographer or inventor, and the royalties relate to a self-created copyright, trademark, or patent, you would report the payments as part of your business income on Schedule C.

Similarly, if you hold an operating oil, gas, or mineral interest in land, you would report your gross income and expenses on Schedule C or C-AZ. Numerous special rules apply to the ownership and taxation of mineral property.

For more information, please review Publication 17 and Schedule E Instructions.