Converting JPG smart objects to use layers?

If you open a smart the work object file Photoshop creates should open in ACR, AI  or Photoshop.  If you make changes in ACR, AI or Photoshop an commit the changes by updating the work file.  Photoshop should see this and in turn update the Smart Object Layer object  with the Updated work file content.   If the Smart object you opened was a placed jpeg file and you add layers you have to flatten the work document so you can use save.  If you try to use save  and there are layers save will switch to save as so you can save a layered file.  You need to flatten if the work object was a jpg so save will update the temp work object file.  Photoshop will only update the smart object layer object if the temp Work object file is updated.

 If  this is not working for you try resetting your Photoshop Preferences and Photoshop Tools. Something on you machine may have become corrupted. 

Hi this only happens when you drag any file to Photoshop you can turn off this from preferences so can work normally....regards

The problem is probably related to the smart objects being based on JPEG files. If you’re making layered edits to them, they can’t be saved as JPEG files because the JPEG file format has no way to store layers.

If that’s the cause, the way to solve it is to add images that are in a format that supports Photoshop layers, such as PSD (Photoshop format) or TIFF. Yes, they will have a larger file size, but it’s the only way you’ll be able to save them with layers.