6322 Royalty Income

Royalty income is compensation paid to the owner for the use of property (usually copyrighted material such as books, magazine articles, manuscripts, music, or artwork), or natural resources (such as minerals, oil, gravel, or timber). Royalty compensation is generally expressed as a percentage of receipts from using the property, or as an amount per unit produced from using natural resources.

Payments for the use of property – Payments for the use of property are assumed to be royalties.

Payments for the use of natural resources – Payments for the use of natural resources will not be considered as royalties unless: There is a formal or informal agreement whereby the owner authorizes another individual to manage and extract a product, and The payment amount is dependent on the amount of the product actually extracted. NOTE : An outright sale of natural resources by the owner of the land or by the owner of rights to use the land constitutes conversion of a resource. The proceeds from the conversion of a resource are not income. See 5200(12) .

Earned income vs. unearned income – Royalty payments are counted as unearned income, unless payments are: Received as part of a trade or business, or Received by an individual in connection with publication of his/her work.

In general, royalty payments for the use of property are considered to be self-employment earned income (see 7122.3 ). Payments for the use of natural resources are considered unearned income. However, the countable amount of payments for the use of natural resources maybe reduced by any severance taxes levied against the production of there source [see 6410 (42) ].

Example 1 : An author receives monthly payments for publication of books she wrote. Since writing is her trade of business, the payments are considered self-employment earned income. The amount of countable income is based on either her federal tax return or the information provided on the KC-5150, Self-Employment Worksheet .

Example 2 : An individual receives quarterly payments from his mineral rights interest in a producing oil well. Since this is not his trade or business, the payments are considered unearned income. However, any severance taxes associated with the oil production may be deducted from the gross payment amount.

Example 3 : A musician receives annual payments from a record company for sales from a song she wrote. Since this is her trade or business, the payments are considered self-employment earned income. The amount of countable income is based on either her federal tax return or the information provided on the KC-5150 .

Example 4 : A landowner sells his timber rights to a logging company that clear cuts the designated acreage and makes a one-time payment to the landowner. This is not a royalty payment. Rather, it is a conversion of property from one form to another (timber to cash).

The payment is not considered income in the month received. The payment is considered a resource in the month after the month received.