J.K. Lasser's Your Income Tax 2013: For Preparing Your 2012 Tax Return

9.11 Reporting Royalty Income

Royalties are payment for use of patents or copyrights or for the use and exhaustion of mineral properties. Royalties are taxable as ordinary income and are reported on Schedule E (Form 1040). Depletion deductions relating to the royalties are also reported on Schedule E. If you own an operating oil, gas, or mineral interest, or are a self-employed writer, investor, or artist, you report royalty income, expenses, and depletion on Schedule C.

Examples of Royalty Income

License fees received for use, manufacture, or sale of a patented article.

Renting fees received from patents, copyrights, and depletable assets (such as oil wells).

Authors’ royalties including advance royalties if not a loan.

Royalties for musical compositions, works of art, etc.

Proceeds of sale of part of your rights in an artistic composition or book, for example, sale of motion picture or television rights.

Royalties from oil, gas, or other similar interests (9.16). To have a royalty, you must retain an economic interest in the minerals deposited in the land you have leased to the producer. You usually have a royalty when payments are based on the amount of minerals produced. However, if you are paid regardless of the minerals produced, you have a sale that is taxed as capital gain if the proceeds exceed the basis of the transferred property interest. Bonuses and advance royalties that are paid to you before the production of minerals are taxable as royalty income and are ...