New client. Looked at previous year tax return that was prepared by another preparer. On Sch E the preparer deducted taxes and depletion. I obtained the Owner Payment History report and spoke to the company that issued them. I asked them where does one locate the depletion in the Owner Payment History since a depletion deduction was taken on the previous tax year Sch E. The Co. replied with "they have NO idea where the preparer obtained the depletion amount". According to the Co., the taxpayer is a Royalty owner but not a Partner or Owner and taxpayer is NOT issued a K-1. The taxpayers receives a 1099-misc with income reported in box 2. The only deductions that appear outside of the 1099-misc is "other deductions". Now you are probably not going to believe this but the only document of the previous years tax return I have is 1st page of Sch E nor any previous years and they cannot locate the rest of the return and cannot get hold of the previous preparer. If depletion is allowed, any way I can calculate it with just the amount of depletion that was deducted?
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Last edited by AZ-Tax; 11-26-2013, 04:24 PM. -
Depletion
Royalties received on a 1099 are eligible for depletion. Oil and gas depletion is 15% for royalty owners and most working interests. Major oil companies are limited to cost depletion.
If it is something other than oil and gas, the rate may be different.
In addition to depletion, which is calculated on gross income, not net income, there would be deductions for severence taxes, trucking charges for oil, compression costs for gas and gathering costs for gas from the well site to the buyer's delivery point. Gathering, compression and trucking expenses would be deducted by the operator from the royalty owner's settlement.
Also if the royalty owner also owns the land from which production occurs, there would be some ad valorem tax paid by the owner himself, not the oil and gas company.Last edited by taxxcpa; 11-26-2013, 05:31 PM. -
Royalty and offsets
Tough case, especially with the Form 1099-MISC getting into the mix.
About the closest comparison I can offer is a client who owns a "royalty trust." They issue no Form K-1, nor any Form 1099. Client receives four payments, via check, each year.
The trust does prepare an annual "tax booklet" which allows you to calculate both income and "administrative expenses" (all shown on a Sch E) by multiplying the number of units owned by a number carried to something like six decimal places. There is also provided a nice worksheet to take you through the depletion calculations - for most people "cost depletion" is the better early route, and at some point that disappears and the owner then goes with per cent depletion. Fortunately the substance of the tax booklet does not change substantially from year to year, so at this stage I pretty well know the routine. NOT so in the Year #1, however.
The resulting Schedule E will always show three entries: Income, "administrative expenses," and allowable depletion.
I have also had some clients who own oil/gas partnership interests, and of course those usually come with a K-1 and all kinds of potential messy tax calculations involved.
As for the case cited in this post, there obviously is a LOT of information missing. . . . . And this statement ("According to the Co., the taxpayer is a Royalty owner but not a Partner or Owner") could open up a very large can of worms.
Hope this helps.
FEComment
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The taxpayer/royalty owner does own the land the oil & gas is produced
The taxpayer/royalty owner does own the land the oil & gas is produced on.Originally posted by taxxcpa View Post
I was emailed a Owner Payment History in a PDF and in a MS Excel spreadsheet. The columns are Check No, Check Date, Status, Product, Int Class, Void Date, Removal Date, Volume, Gross, Taxes, Deducts, Backup W/H AR Deduct/, Check amount. Is looks like the MS Excel spreadsheet has the same data where I can insert formulas. Anyone know how to read these Owner Payment History reports?Comment
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very simple problem
There is nothing special or difficult with this situation. I have several every year, including my own. The mineral owner is paid a percentage of the O&G removed from their property. That will be reported to them on a 1099-misc each year. Some, actually most, companies will provide a statement that shows the gross and net royalties. There are very few other deductions on this income. 15% income depletion is to be taken on this income for as long as the well produces. There will seldom be real estate taxes on this property unless the surface and mineral rights have been severed and the auditor (or whatever the taxing authority is) actually puts a taxable value on the property. These taxpayers are not working interest owners, so don't get all those rules mixed up in this example.
We have had to get totally educated about this subject in our area the past couple years due to the new shale plays.AJ, EAComment
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AJsTax, how is box A thru L completed on Sch E?
As mentioned, all I have to go by is page 1 of the Sch E. Is it just "Royalty Property" D or are there any other boxes that need to be checked and if so which ones? Single filer.Comment
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Boxes to check
For description, I show "Royalty Interest"
Did you need to file any 1099s? I check "NO"
Check the Box for Royalty rather than the boxes for rentals or 'other'
Enter the Gross royalty received, deduct 15% depletion (if it is oil and gas).
Enter other deductions as shown on statements from the operator--such as marketing costs, gathering/trucking costs, severance/production taxes, etc.
The complicated part is for the operator of the production, especially if it gas--there may be chromatograph tests, charcoal or compression tests for liquid content. BTU of the gas needs to be determined either on a dry basis or on a fully saturated with water vapor basis. It may be processed in a plant and liquids and residue gas has to be allocated back to the source of the production, and measured several times as it is commingled with other gas during gathering.Comment
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