Depletion on Royalty Payments

[Duane Anderson]

My understanding is that when a taxpayer receives royalty's they are allowed to take a 15% depletion allowance on the total receipt.

Would this also apply to a taxpayer who owns the mineral rights and receives the royalty but does not own the land. The Royalty's are earned in North Dakota and the taxpayer lives in Washington.

Thanks,,,Duane Anderson

[taxxcpa]

Any royalty or overriding royalty is entitled to take a depletion allowance (15% if oil & gas).

Working interest owners sometimes raise cash by selling an overriding royalty carved out of the working interest and not connected to land ownership. For example if you have 100% of the working interest, and there is a 1/8 royalty, you have a net of 7/8. If you sell someone an overriding royalty, your gross income is limited to the net ownership after deducting the royalty and overriding royalty.

Even if the working interest owner is a major oil company and is limited to cost depletion, a royalty or overriding is allowed 15% depletion for oil and gas.

Also, someone might sell their mineral interest and retain the land ownership--or they might sell the land and retain the mineral interests.

Coal, timber, etc. may have different percentage depletion allowances. I'm only familiar with oil and gas

[Jiggers]

Check out TheTaxBook, page 9-21, for depletion information.