Non participating royalty interest

[TEXASWAYFARER]

My client purchased a non participating interest in a mineral interest. The royalty company sent my client a 1099 misc and posted the royalty received on line 7, non employee compensation. My client tells me this is regular interest and not a working interest. He wants to recover his initial cost before he pays taxes on any of the royalty. I believe he can only claim 15% depletion per year to recover his costs. He wants to claim all of his initial cost in the first year. I also believe the royalty received should have been reported on line 2 of the form 1099. How should I report this on his tax return? thanks

[FEDUKE404]

Cost question

I would be curious to know what your client might intend to include in his "initial cost" ??

FE

[Roland Slugg]

In your post you have used several terms very imprecisely, making it difficult (at least for me) to clearly understand the situation. Nevertheless, I shall attempt to offer information that may be helpful.

Despite what your client may have told you, it is very possible ... even likely ... that your client actually does own a fractional working interest. If so, the payments he received have been correctly reported in Box 7 of form 1099-MISC. Payments made to royalty interest owners are reported in Box 2 of that form, but royalty interests are owned by the landowner or by those who have acquired an interest therein from the landowner. What your client probably owns is a "non-operating working interest" in the lease arrangement, and if this is so, the income is reportable on Schedule C.

He wants to recover his initial cost before he pays taxes on any of the royalty.

Irrelevant.

[TEXASWAYFARER]

I would be curious to know what your client might intend to include in his "initial cost" ??

FE

According to my client, who is an attorney here in Texas, he purchased one-half of a mineral interest. Since it is a non participating royalty interest, he has no lease signing privileges, but just collects royalty. He wants to charge off the initial cost he paid for the half interest. There is no breakdown on the amount he paid. thanks

[TEXASWAYFARER]

I apologize if I have used terms that confuse anyone. According to my client, he purchased half of the mineral interest from the family who inherited this mineral interest. He says it is royalty income and wants to charge off the cost he paid the heirs against the royalty income earned for 2015. He thinks he should not pay any tax on any of the income until he has recovered all of his cost in the interest. I believe he can only charge off a portion of the cost as depletion. thanks

[DaveO]

If he has a fractional working interest he must use cost depletion not percentage He should have received a geological survey report showing what is available to him. If this is a new well he may be able to deduct intangible drilling costs but again, he should have a report that would identify those costs.