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Permalink Reply by Tom R on February 6, 2014 at 3:55am

You don't have to pay income tax on the deductions. When you file the schedule E reporting the royalty income, the company deductions should be entered on line 19 as an expense against the gross. The amount of expenses will not show up in the body of the 1099 form, most I've seen list them on the back of the form. Also, don't forget to take the depletion allowance which is calculated as a percentage against the gross royalty amount.

I am not a lawyer or tax adviser, so you should check with a professional or dig into the regulations for yourself, but this is the way it has been explained to me.

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Permalink Reply by robert g. weaver on February 6, 2014 at 6:27am

Ok I understand that but how does one go about figuring depletion?  With so many deductions and prices up and down, how do we know if the wells are turned down low or its actually depletion, sorry but this is so new to many of us.

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Permalink Reply by Tom R on February 7, 2014 at 3:39am

     Check this link,

http://www.irs.gov/uac/Newsroom/Tips-on-Reporting-Natural-Resource-...

Pub. 535 goes into more details, but the short answer is that you can just calculate 15% of the gross royalty as your depletion allowance. It is more complicated if you are the operator or a producing company but for those of us simply getting royalty payments the IRS allows the simple calculation. Does not matter about what deductions the producer applies, price variation or production levels, just figure based on the gross amount you receive.

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