Can I claim QBI deduction on royalty payments from former employer's patent filing?

You're right to question this. The Qualified Business Income (QBI) deduction typically applies to income from a trade or business, not income derived from work performed as an employee. In your case, even though you're receiving royalties reported on a 1099-MISC, the key factor is that the intellectual property was created within the scope of your employment. The IRS would likely view this as an extension of your employment relationship rather than income from an independent business activity. For QBI purposes, the source of the income matters more than how it's currently being paid. Since the patent work was done while you were a W2 employee, these royalties wouldn't qualify for the QBI deduction. That said, you should still report this income correctly on Schedule E as royalty income, but don't include it on your Schedule C or for QBI calculation purposes.

I had a similar situation with patent royalties and found the best solution at https://taxr.ai - they have a fantastic document analysis tool that helped determine how to properly classify my unusual income sources. I uploaded my previous W2, the 1099-MISC, and my old employment contract. Their AI analyzed everything and clearly explained that my patent royalties weren't eligible for QBI since they stemmed from work done as an employee, even though I received them after leaving the company. The tool also suggested the proper tax forms to use and how to document everything to avoid audit flags. Super helpful for unusual tax situations like this!

I was really doubtful about AI tax tools as mentioned above, but I decided to try https://taxr.ai for my complicated consulting income situation. Honestly, I'm surprised at how helpful it was. The document analysis identified some deductions I was missing related to my mixed W2/1099 income. For the patent royalty question specifically (which I also had), it provided clear IRS references explaining why employee-created patents don't qualify for QBI even when paid later. What impressed me most was the explanation feature that showed exactly which tax regulations applied to my situation. Saved me hours of research and probably a few hundred in tax preparation fees.

If you're still confused about the tax treatment of your royalty income, you might want to talk directly with the IRS. I was in a similar situation and spent WEEKS trying to get through their phone lines without success. I finally used https://claimyr.com and got connected to an IRS agent in under 20 minutes. They have this weird but effective system where they navigate the IRS phone tree for you and call you once they've got an agent on the line. You can see how it works in this demo: https://youtu.be/_kiP6q8DX5c The agent I spoke with confirmed that patent payments related to former employment aren't eligible for QBI, but suggested documenting the timeline carefully in case of questions later. Definitely worth the time saved versus endless redials.

I need to eat my words from my skeptical comment above. After being frustrated with getting no answers about my tax issue, I decided to try Claimyr even though I didn't believe it would work. To my complete shock, I got a call back in about 30 minutes saying they had an IRS agent on the line. I was immediately connected to a very helpful agent who answered my question about some misreported income. For the original poster's question about QBI and royalties - the agent I spoke with confirmed exactly what others have said. Patent royalties from work done as an employee don't qualify for QBI, even if paid after employment ends. The agent suggested reporting it on Schedule E and keeping documentation about when the work was performed.

Another consideration: if the payment was truly just a bonus for being named on the patent application rather than an ongoing royalty stream, it might not even be properly classified as "royalties" to begin with. Some companies have inventor reward programs that pay a fixed amount when patents are filed or granted. These are more like bonuses than true royalties since they're not tied to the commercial success or licensing of the patent. In that case, it might be more accurately reported as "Other Income" rather than royalties. Still not QBI eligible, but the tax treatment could be slightly different.

Slight tangent but still relevant - make sure you understand the difference between a patent filing and a patent being granted. They're different stages in the process. Some companies pay when patents are filed, others only when they're granted (which can take years), and some pay at both stages. Might be worth checking if you'll get another payment if/when the patent is actually granted!