landowner

Income Tax and Depletion Allowance

It's time for all who receive royalties to think about taking the depletion allowance on their tax forms. Chapter 9 of IRS Pub 535 says:

"To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income from the property during the tax year."

But, what does the royalty owner do if the operator never tells him his gross income or gross gas price?  As we've learned, some operators only report net prices and net income to their royalty owners.  These royalty owners, therefore, have no way of knowing how much they may legally deduct. 

We've seen deductions can exceed 75 cents/mcf in some cases.  If you take depletion based on the net proceeds you recieve, rather than the gross proceeds, you could be costing yourself a lot of money. 

So if your producer does not provide gross proceeds on your monthly statements, I suggest you contact them and ask for the gross proceeds, so you may obtain the maximum deduction allowed on your taxes.  They may complain that this is a lot of work for them, and it might be.  However, the fault is theirs.  Had they been transparent in the first place, and showed all the numbers on the monthly statements, then their royalty owners would not need to call and request this information.

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Permalink Reply by Linda Whatley on January 28, 2011 at 15:07
Thanks Henry.......  I haven't received my 1099 yet, but hopefully Chesapeake will provide what I need.  If they don't, then I'll just have to give them a call.....     Thanks again for reminding us!!!!

landownerPermalink Reply by FXEF on January 28, 2011 at 15:21

Henry,

 I assume that gross share and net share would be the same for cost free royalty owners, as there are no deductions. 


landownerPermalink Reply by Henry on January 29, 2011 at 0:24
I would assume (hope) so.   But you might want to check the number on your 1099, and add back in all taxes too.  I would assume (a bad thing to do) that the 1099 number is the amount that you received in your monthly checks.  Even if you have cost-free royalties, you can add back severance tax and any other taxes that might be deducted to make your gross number higher.  And then that is what you use to calculate your 15% depletion.

landownerPermalink Reply by FXEF on January 29, 2011 at 7:37

Henry,

My 1099 shows GROSS and NET as the same. Thanks for this tip on depletion allowance.


landownerPermalink Reply by Henry on January 29, 2011 at 0:28
FYI... I did some thinking last night.  For a small landowner, this is in the noise.  But, let's say you made $100k in net royalties last year.  Your gross would have easily, with some operators, been $125k.  If you took 15% of the lower number as your depletion allowance, then you'd have $85k as taxable income.  If you took 15% of the higher number, then you'd have $81,250 in taxable income.  If you are in a 30% bracket, you will save over $1000 by using the correct numbers.
Permalink Reply by Linda Whatley on January 29, 2011 at 4:03

Thanks again Henry.  Hopefully, my 1099 will arrive soon, and I'll let you know what's on it.

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