Need help regarding 15% depletion

Any tax experts out there?  I've Googled this but no luck so far:

For 2014 and (completely separately) for 2015, will the 15% depletion allowance (on royalties) continue to be available to royalty owners?  It's been a nice help in the past.

There are so many changes to tax law that it's difficult to keep up.  Did the Obamacare law possibly nip us on this one, or maybe some other change?  Or are we still in the clear for now?

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Permalink Reply by Philip Thackray on January 10, 2015 at 10:17am

Frank,

The depletion allowance is still there.  My accountant thinks that you can apply the 15% to the gross royalty (before deductions).  I can elaborate on his reasoning if you wish.

Phil

Permalink Reply by Frank Walker on January 10, 2015 at 3:20pm

Philip, many thanks.  That's very good news, indeed.  I do not personally have a royalty deductions concern because I have none.  Gross is net for me.

But I think other forum members might be interested in reasoning which would allow them to boost their depletion dollar amount.  It's not something that would have occurred to me, I can tell you that.  And it sounds pretty good!

At the same time if you take a larger dollar amount of depletion, based on gross, and given you are reporting a top line number which is net . . . well . . . it's going to be pretty obvious to the IRS that you're over the 15% (of net).  I mean, it's quickly really clear.  So if they don't agree with the "over 15 gross vs. net" thinking you could be hearing from the IRS relatively quickly!  Course I guess in your case it would be your accountant receiving that complaint, which is not as bad.  Those of us who do their own taxes do not enjoying hearing from the IRS.

Permalink Reply by Philip Thackray on January 10, 2015 at 3:47pm

Frank,

The essence of the law is that you can deduct 15% of your royalty amount at the wellhead which is the way it was done for years before the onerous deductions many of us now see.  The deductions are just a cost of making the gross sale and so are, well... deductible.

The 1099 reports Gross, Deductions and Net.

In the Federal Reportable Income column is the Gross number .

In Box #2 (Royalty) income is the Gross.

So take 15% of the Gross and deduct that from the Gross and then deduct the Deductions number from that number and that is your taxable Royalty income.

Phil

Permalink Reply by Frank Walker on January 10, 2015 at 4:18pm

Thanks, Philip.  I'm sure that's helpful for many.  For myself, since gross and net have always been equal to one another, it's not something that's a focus right now.  I'm afraid in future, though, my good fortune could come to an end abruptly.  At that point I'll need attentively to bear in mind your instruction.

Permalink Reply by Philip Thackray on January 11, 2015 at 8:04am

Frank,

I hope you never have to know deductions.  Since deductions are based on volumes, they are especially bad in this low price environment.

Phil

Permalink Reply by Billy Park Whyde on January 11, 2015 at 4:54pm

Let me throw this in. Is the amount being deducted by say CHK going to be a write off for the royalty holder? 

Permalink Reply by Philip Thackray on January 11, 2015 at 7:15pm

Take the Gross number from the 1099 and multiply that by 0.85 (-15%), subtract all Deductions (also on the 1099) from that number and that is your taxable Royalty income.  Royalty income is taxed as ordinary income like interest income.

Phil

Permalink Reply by Nancy Mosley on January 11, 2015 at 8:10pm
One of our companies has been charging transport fees, and on the monthly check stubs lists owner gross, trans (transport fees, owner's share) and owner net (gross less trans). The 1099 just came and the only amount listed was the net but was not called anything except was in the royalty box. This only started the end of 2013 and I wasn't sure what was happening (could not get an answer on what "trans" meant) so I didn't deal with it for 2013 taxes, and only a few dollars. Sounds like I need a revised 1099 listing gross and net and deductions. Or they could refund the trans fees!
Permalink Reply by Philip Thackray on January 12, 2015 at 8:21am

Nancy,

I am in an XTO unit.  They provide a "Substitute 1099-MISC Form 2013".  That form has spaces for the GROSS VALUE, SEV/PROD TAX. OTHER DED, WITH-HOLDING, and NET.  An actual 1099 only has a box for ROYALTIES (Box 2).  The XTO form has a line labeled Box #2 ROYALTIES and the GROSS number is in this box.

I don't know how an account would report your situation to the IRS.

Phil

Permalink Reply by Nancy Mosley on January 12, 2015 at 9:07am
Thanks I need to investigate.
Permalink Reply by AJ on January 16, 2015 at 7:19pm

As a tax preparer dealing with this issue often, you need to supply to your tax person all of your monthly reports in order to determine the correct numbers. Most will just use the net amount if the owner does not take the time to gather the correct information. Depending upon the amount of royalties and deductions this can add up. many do not know to use the gross for depletion and if the taxpayer does not supply that number they have no way of using the correct number. I do know that CHK shows the gross and deductions on the back of the 1099.

Permalink Reply by Happy Dad on January 16, 2015 at 11:52am

Okay, I have a related question...  Is it mandatory that a taxpayer deduct the 15% depletion allowance, or does the taxpayer have the option to ignore it?  I started receiving royalties last year for a property owned by my IRA, so that royalty income is tax-free.  Purely for the sake of simplicity, I would prefer to ignore the depletion allowance...  it makes no difference to my bottom line since I don't pay taxes on IRA income.

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