Oil & Gas Revenue

[Gary]

I have a client that inherited oil and gas revenue from her father that passed away last year. She received a 1099-misc with gross revenue in Box 2, federal withholding in Box 4.It appears that the income is from Michigan. This is not a standard 1099-misc and there is also an amount called severance tax. I know the royalty goes on Schedule E, but what is the severance tax? Also, I assume I need to calculate depletion? I have never done this before. What questions do I need to ask her?

Thanks,

Gary

[Uncle Sam]

Oil & Gas Revenue

Is this income from a "working interest" from the production of oil/gas wells? If it is, then it goes on Schedule C, subject to SE tax.
On P. 9-21 of TTB it gives you the depletion allowances, but it doesn't disclose the allowance for Oil and Gas wells - which is 15%.
If the income is for the use of the land, that's royalty income that does go on Schedule E.
Don't know what severance taxes are.

[Gary]

Box 2

Since it was in Box 2 of the 1099-misc, I would assume it is a royalty.

[thomtax]

I don't know for sure if there is a federal severance tax or not, but it is often a state tax. We have a lot of it here in Arkansas. Where I see it most, because of my part of the state, in timber production. It is a tax based on the idea of severing something from the ground. Just another way to get a few tax dollars.

LT

[S T]

Oklahoma

I have a client that receives oil/gas royalties from Oklahoma, and they have listed on the year statement severance tax and production tax. When I complete the schedule E, I just include under taxes as a deduction. The money has been deducted from the t/p reveneue.

From investopedia - Severance Tax http://www.investopedia.com/terms/s/severance-tax.asp

Sandy