landowner

Can anyone explain depletion allowance?

I  ran into a roadblock when trying to do taxes using turbotax.  We didn't receive much in royalty so I thought I'd give it a shot on my on.  When I entered the royalty amount it asked about a depletion percentage.  I don't know what this is and turbotax suggests 15% for small interest owners.  How do you calculate the depletion allowance?  Do I need to give up and take this to a more qualified tax preparer?  Don't want to invite the IRS over a couple of thousand in royalties.  Jeff

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landownerPermalink Reply by Joe Aldridge on January 23, 2011 at 13:31
Jeff, The "Depletion Percentage" was an amount that the Feds allowed to be taken off because the resource is being depleted. I though that was discontinued a number of years ago. That evidently is not the case any more. Tax law changes yearly. Turbotax should have an explanation of that in the program. Otherwise go the the IRS web site and ask the question in their query section. Its at the top of their page.

landownerPermalink Reply by Jan Childress on January 23, 2011 at 13:55

They keep talking about eliminating it Jeff, but I think it's still available. 

Here's another explanation.

http://www.mineralweb.com/owners-guide/leased-and-producing/royalty...


landownerPermalink Reply by Jan Childress on January 23, 2011 at 13:37

The short answer...take the 15%. 

The long answer...A working interest owner is entitled to a deduction for the greater of cost depletion or allowable percentage depletion. Cost depletion is based on the property's leasehold cost (LHC) and is calculated using the mineral reserves (obtained from engineering reports) and the number of units sold for the year. Cost depletion stops when the LHC is fully depleted. Percentage depletion continues (even after LHC is depleted) because it is based on a percentage of gross income from the property. (Reference Thomson Reuters 1040 Quickfinder 2009)

 

Can't advise you whether or not to go to a professional but I highly doubt IRS will visit for this particular issue.

 

 


landownerPermalink Reply by Jeff on January 23, 2011 at 15:32

Jan,

Thanks, I think I'll keep doing my own taxes at least until the big money starts coming in.  Notice I said when and not "If". 

Heres hoping.  Jeff


landownerPermalink Reply by Jeff on January 23, 2011 at 15:27

Thank you all for your replies.  You have been very helpful.  I will continue with the taxes and take the 15% allowance given.  Maybe there have been others helped by this little discussion. 

Before GHS we wouldn't have anywhere to ask advice of people in the same situations as us. 

Thanks Keith for giving us the opportunity to share. 

Jeff


landownerPermalink Reply by Henry on January 23, 2011 at 15:28
I believe you get 15% for gas.  My experiences with Turbo Tax were that I could not get the program to do it automatically.  I always had to go back and manually put it in.

landownerPermalink Reply by Jeff on January 23, 2011 at 15:37
The one I am using asks the question as soon as you enter a  o&g royalty figure.  They even prompt you to use the 15%. 

landownerPermalink Reply by Polly Ann Foote on January 24, 2011 at 12:55
In turbo tax the depletion allowance is taken on the screen where expenses are listed. Turbo does not figure the tax nor does it tell you to use 15%. The 15% is taken off the gross amount, not the total amount of money you received.
P.Foote

landownerPermalink Reply by Henry on January 24, 2011 at 13:26

Polly,

This raises an interesting point.  If you have Chesapeake as your driller, and they never tell you the gross amount for which your gas was sold, then you must call them to find out.  Is that right?

Permalink Reply by Linda Whatley on January 24, 2011 at 14:55
Geezzzzz.... I sure hope my CPA is up on all of this stuff!!!!!

landownerPermalink Reply by Jeff on January 25, 2011 at 1:12

Polly,

On the version we were using, I believe it is the premier version, as soon as you enter your royalty, the next screen asks you to enter the depletion allowance.  When you hit the button asking what is this it explains that usually this is 15% for a small interest owner.  When you enter 15% it calculates what your taxable royalty is and enters it on your tax return.  Jeff


landownerPermalink Reply by Polly Ann Foote on January 24, 2011 at 14:52
Henry:
When you get your checks, there is usually a statement attached which details the volume, the price received for the product, the gross, taxes and/or deductions and net. In most of my checks they are in a row and you can easily see they have subtracted the taxes and/or deductions from the gross to get the net. However, I have one check where the taxes and deductions are listed as a negative under the net and subtracted from it. The check lists my net as 36.82. Then underneath that is a -1.87 for state taxes and the check is for 34.95. Thus in this particular case their net is really my gross. Hope this is not too confusing.
P. Foote

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