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Greetings, Stockop, and welcome. You asked:

<<For many years I owned a small business and have contributed some retirement funds in a SEP. In September of 1997 I incorporated taking on a partner. I licensed my old company name (trademarked and registered) and business techniques to the new corporation. Since then, neither my partner nor I have taken any income out of the corporation, but I do receive a monthly royalty as agreed to in the licensing agreement

My question is how do I treat this royalty payment, and how can I shelter some of this income? Is it considered earned income? I was told that somehow capital gains might come into play at some point. Since I am no longer self-employed I assume I will not be eligible to contribute to my SEP Plan. Could I open an IRA at this point if the royalty income is considered earned income? Any other ideas?>>

I'm not sure how royalty income is treated. Perhaps you should pose this question on the Tax Strategies board where our tax maven, TNF Taxes, holds court. If it's considered "earned compensation," then certainly you are eligible for a deductible IRA provided you currently don't participate in a qualified retirement plan through another job. If it's considered self-employed compensation, you can even use a SEP. If it's considered neither, than there's no other way to shelter it from current income taxes.

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