Form 8960 question on computation

[NECPA in NEBRASKA]

I don't know if ATX is correct or not. My client has rental property income and received royalties which are reported on 1099-Misc and flow through to the Schedule E. The net rental positive income from both is showing on line 40 of the 8960 as I would expect. Line 4b is showing a negative amount that offsets the total above with the worksheet saying royalties derived in the ordinary course of a Section 162 trade or business that is not a passive activity. I did not put this amount in there, it was pulled over by ATX. Everything that I can find says that royalties ARE passive income. I can override the amount to 0, but I want to make sure that I am not missing some new ruling about royalties. Example 4a $30,000 4b -$30,000  Thanks for any help on this form. This is only my second one of these and it sure has some different calculations, such as the state income tax attributable to the income, etc.

 

Thanks!

 

[kcjenkins]

Line 4b is from the worksheet, where line 1 is pulled from the K1.  So look at he K1 and make sure that the box is checked for 'Passive Activity' there.

[NECPA in NEBRASKA]

Thanks, KC. There is no K1. It is being pulled from the various 1099-MISC in box 2 Royalties. I think that I will just override it, because I can not see anyway to get it to work. The 1099's are flowing through to the Schedule E, so it is definitely being shown as passive income. 

[jklcpa]

Does this help?  From Pub 925:  http://www.irs.gov/publications/p925/ar02.html#en_US_2013_publink1000104579

Passive Activity Income

Passive activity income includes all income from passive activities and generally includes gain from disposition of an interest in a passive activity or property used in a passive activity.

Passive activity income does not include the following items:

Income from an activity that is not a passive activity. These activities are discussed under Activities That Are Not Passive Activities , earlier.

 

Portfolio income. This includes interest, dividends, annuities, and royalties not derived in the ordinary course of a trade or business.
 It includes gain or loss from the disposition of property that produces these types of income or that is held for investment. The exclusion for portfolio income does not apply to self-charged interest treated as passive activity income. For more information on self-charged interest, see Self-charged interest , earlier.

Personal service income. This includes salaries, wages, commissions, self-employment income from trade or business activities in which you materially participated, deferred compensation, taxable social security and other retirement benefits, and payments from partnerships to partners for personal services.

Income from positive section 481 adjustments allocated to activities other than passive activities. (Section 481 adjustments are adjustments that must be made due to changes in your accounting method.)

Income or gain from investments of working capital.

Income from an oil or gas property if you treated any loss from a working interest in the property for any tax year beginning after 1986 as a nonpassive loss, as discussed in item (2) under Activities That Are Not Passive Activities , earlier. This also applies to income from other oil and gas property the basis of which is determined wholly or partly by the basis of the property in the preceding sentence.

Any income from intangible property, such as a patent, copyright, or literary, musical, or artistic composition, if your personal efforts significantly contributed to the creation of the property.

Any other income that must be treated as nonpassive income. See Recharacterization of Passive Income , later.

Overall gain from any interest in a publicly traded partnership. See Publicly Traded Partnerships (PTPs) in the instructions for Form 8582.

State, local, and foreign income tax refunds.

Income from a covenant not to compete.

Reimbursement of a casualty or theft loss included in gross income to recover all or part of a prior year loss deduction, if the loss deduction was not a passive activity deduction.

Alaska Permanent Fund dividends.

Cancellation of debt income, if at the time the debt is discharged the debt is not allocated to passive activities under the interest expense allocation rules. See chapter 4 of Publication 535, Business Expenses, for information about the rules for allocating interest.
 

Edited September 23, 2014 by jklcpa
formatting only

[NECPA in NEBRASKA]

Thank you, I had read that and since the royalties were not received in the ordinary course of a trade or business, I did not think that they should reduce the net investment income. The program was automatically pulling it over as a deduction so I overrode the line to 0.

[SaraEA]

I too have been confused by the different meanings of "passive income."  The definition for the passive activity loss rules is different than for investment income or foreign tax credit, for example.  For the passive activity loss rules, only rental income and income from activities in which the taxpayer does not materially participate are considered passive income.  Investment income, like from a hedge fund or PTP, is portfolio income,  not passive income for this purpose.  For the net investment income rules, just about any income not derived from a trade or business is counted.  Thus mutual fund income, not passive for passive activity loss rules, is counted as investment income, as is rental income even if the taxpayer materially participates (exception for RE professionals).

 

Read every question on the input screen carefully.  The same income has to be classified twice, once for the passivity activity loss rules and again for the net investment income rules, and the class can very well be different.  Can anyone say the tax code needs reforming?