When you prepare and file your federal income tax return each year, you are required to report all taxable income. While some income clearly qualifies as taxable income, such as wages, other income must be included as well. Royalties, for example, are considered taxable income and must be included on your return. If you are self-employed, and incurred expenses in the course of generating royalties, those expenses may be deducted as well.
Royalties are typically a type of residual income which you receive as a result of ownership interest you have in a copyright or patent as well as in oil, gas or mineral rights. If you own a patent or copyright for an invention, work of art or similar property, you are usually paid royalties when the property is used. That income is taxable and must be declared. Similarly, if you own the oil, gas or mineral rights to real property, and gas, oil or minerals are extracted from the property during the tax year, then you should have received income in the form of royalties for the extraction and must report the income on your tax return.
How to Report Royalties
Royalties are generally reported by completing and filing IRS Schedule E -- Supplemental Income and Loss -- with your federal tax return. You will report the total received in royalties on line four. Any expenses incurred can be deducted on lines five through 18. The total amount of expenses is then deducted from the amount claimed on line 4 to determine your taxable income from royalties.
If you were self-employed during the tax year, you will complete IRS Schedule C -- Profit or Loss From Business -- and attach it to your tax return. A writer, for example, if often considered self-employed and must complete Schedule C. In that case, you may include royalties on line six under "other income". Expenses you incurred as a result of your business are then reported on lines 8 through 27. The total amount of expenses are then deducted from the total amount of income to arrive at your taxable self-employment income.
If you owned oil, gas or mineral rights to real property and sold your entire interest in those rights during the year, your monetary gain is not reported as royalties. Instead, the profit is considered profit for the sale of 1231 property and may be subject to the payment of capital gains or losses as reported on Schedule D.