Tax Question

In the middle of January, 2015, we received our first check from EQT on the first production of a new well (the production occurred in 2014). We then received a 1099 from them for 2014 even though we were not paid until 2015. Is this correct? If so, what about checks we may receive for wells we know that were producing in 2013 and 2014, but have yet to be paid on. Assuming we get paid after April. Do we have to go back and amend our 2013 and 2014 tax returns? Something doesn't seem to add up, but maybe its just my lack of knowledge about accounting.

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Permalink Reply by Nancy Mosley on February 14, 2015 at 6:31am

What was the date of the check you received in January from EQT? I have received a check in March dated December the previous year. I think the 1099 came then as well. I know they are supposed to send out 1099s by Jan 31 but who checks? Lucky for me that year I had not finished my taxes yet.

Production date is not the important thing for tax year things, since production from e.g. November 2014 probably won't be paid as royalty until sometime early 2015. At least that sort of thing has been my experience.

Makes it hard to predict when a check might come for a new well.

Permalink Reply by bo boboski on February 14, 2015 at 6:40am

It's not 2014 income if you didn't receive it until 2015.  Maybe they can deduct it as spent $$$ for 2014. Check the date on the check.

Permalink Reply by Jim White on February 14, 2015 at 7:27am

Check was dated the 9th of December and I received it the 15th of January.

Permalink Reply by Bobbie Farmer on February 14, 2015 at 7:36am

When I got my signing bonus in Jan 16 2013 the check was dated Dec 27 2012 had to pay the taxes 2012 taxes

Permalink Reply by Frank Walker on February 14, 2015 at 4:13pm

Jim

The term of art in this situation is "constructive receipt".  When you receive the money does not matter.  What matters is when you have constructive receipt of the money.  You can Google "constructive receipt" and learn more.  Let me offer you an example:

Suppose you and the Mrs. decide it's time for some Puerto Rican getaway time, a little "fun in the sun".  You two fly down, but before you leave you (wisely) stop your mail.  You formally notify the USPS to hold your mail, and not deliver it, until you return from your holiday.  While you're away a large check arrives, and it is held at the post office along with all your other mail.  Well, you might be in Puerto Rico, but the day that check arrives at the post office is the day you have constructive receipt . . . . and no excuses!

Oh, what the heck.  There are a gazillion different explanations of this out on the net, but here is just one reference for you:

Constructive receipt explained

As I said, if you Google the term you will find many more writings on this topic.  It's pretty routine stuff.

BTW, if you still have the envelope in which the check was mailed, and if that envelope has a postmark, that might help you prove your case, should you ever be challenged.

Permalink Reply by Frank Walker on February 15, 2015 at 4:49am

This is a direct, unedited, copy and paste lift from IRS Publication 538:

"Income


Under the cash method, you include in your gross income all items of income you actually or constructively receive during the tax year. If you receive property and services, you must include their fair market value (FMV) in income.

Constructive receipt.   Income is constructively received when an amount is credited to your account or made available to you without restriction. You need not have possession of it. If you authorize someone to be your agent and receive income for you, you are considered to have received it when your agent receives it. Income is not constructively received if your control of its receipt is subject to substantial restrictions or limitations.

Example.

You are a calendar year taxpayer. Your bank credited, and made available, interest to your bank account in December 2012. You did not withdraw it or enter it into your books until 2013. You must include the amount in gross income for 2012, the year you constructively received it.

You cannot hold checks or postpone taking possession of similar property from one tax year to another to postpone paying tax on the income. You must report the income in the year the property is received or made available to you without restriction."

'Nuff said.

Permalink Reply by bo boboski on February 15, 2015 at 5:21am

From reading that from the Infernal Revenue service,  You cant count it income  until you can deposit it into your account without restriction. Which means, if you cant constructively use it, then its not your income. Exc. If I pay you $1000. like, NOW.  but You don't get until Jan. 2016 . you cant constructively use it. this year. I may,or may not be able to deduct it this year,that's another question. If I wait till next year to send it, you don't get this year. If I send it now, and YOU HOLD THE CHECK till next Jan. then you will have to count it as this year's income.IMO

Permalink Reply by Frank Walker on February 15, 2015 at 5:34am

Yup.  "Constructive receipt" might sound fancy, but it's not anything new and it's not a big deal.  All the references say about the same thing with regard to it.  I only posted the IRS text because some folks might think that is more authoritative.  People do need to take to heart the principle, though.  Constructive receipt, not physical receipt, is the basis on which the IRS does its reckonings.  They ain't gonna change, and none of us taxpayers is gonna be able to make 'em change.

Permalink Reply by Frank Walker on February 15, 2015 at 2:48am

Hey, Jim

After a bit more time to think on your question, here is some additional counsel:

If you had constructive receipt of the money in 2014, pay up baby!!  And remember, again, it's constructive receipt that matters, NOT physical receipt!

But you appear to be saying you did not have constructive receipt in 2014.  So what next?:

If the IRS receives a 1099 from a third party that disagrees with your personal reporting, you're gonna have problems.  It will trigger, at the least, a letter from your friends at the IRS demanding payment.  So your first move is to write to EQT, tell them you did not have constructive receipt in 2014, and request they send a revised 1099 to the IRS, with a copy to you.  You have roughly two months remaining to exhort them to do that.  And since these things can take time, your letter to EQT needs to be in Tuesday's mail.

What do you do if:

1.  You did not have constructive receipt in 2014 and

2.  EQT refuses to issue a revised 1099

You will need to file the appropriate form with the IRS, I think it is Schedule E, showing only the royalty monies constructively received in 2014.  If it's zero, then you fill in all zeroes.  Then you will need to file a letter, attached to Schedule E and marked "Attachment to Schedule E" at the top along with your name, SS number, and filing year (2014), then below saying "Letter of Explanation".  In that writing you will reference the amount shown on the erroneous 1099 and tell the IRS the money was NOT constructively received in 2014 and will be reported on your 2015 return.  If you have proof as to the actual date of constructive receipt, things will be easier for you.

War story:

Years ago I got into a constructive receipt battle with Charles Schwab, the brokerage house.  It had to do with agency, and the fact that if one's agent has constructive receipt of (whatever) funds, then you (as principal) also have constructive receipt at that moment.  That was a messy one, and the letters flew back and forth with Schwab refusing steadfastly to issue the revised 1099.  I finally won that battle by submitting to Schwab a letter to me (which I had requested) from one of their agents stating they were, indeed, Schwab's agent.  You would think Schwab would have known, right?  Well, never try to underestimate the intelligence of a bureaucracy!

Up against EQT as you are, Jim, you could easily have on your hands a battle equal to or worse than the one I had going up against Schwab.  Be prepared, and get that letter out to them ASAP.

Permalink Reply by joe on February 16, 2015 at 2:03am

I am not a lawyer nor a CPA, so take what I say with a grain of salt. All true tax advice should come from a lawyer or CPA. But I'll give my two cents anyways.

Ultimately you are going to owe taxes on it, whether it be this year or next. So if you expect to be in the same or a higher tax bracket next year, why not just pay this year and save yourself the headache of trying to fight with EQT over the 1099. They sent it to you, and are sending it to the IRS, so the IRS will expect payment on it this year if you don't get EQT to amend/withdraw the 1099. If you decide to go the route of fighting EQT, good luck.

As far as the other wells go; no you will not have to amend your prior returns. The only reason you got the 2014 tax year 1099 is because the check from EQT was dated 2014. Taxes are due for the year that the money was received in, which in EQTs eyes is 2014 because that is the date of the check. I'm guessing that their 1099 system is pretty automated, and just looks for checks cut during a particular year and issues 1099s. If EQT or another producer were to claim you were paid other money in 2013 or 2014, then you should have already received those 1099s.

Again, not an attorney or CPA, but don't forget to claim your depletion allowance.

Permalink Reply by Michael Allen on February 17, 2015 at 4:38am

Call your tax man, but my take is to use which ever year you can afford to claim the income.

Permalink Reply by w. k. chirpas on February 17, 2015 at 6:07am

Look up the term "constructive use".  Generally you should not be taxed until you have use of the money.  Consider how payroll works.  You work the last two weeks of the year and receive the money in you first pay of the following year.  You are taxed when you have use of the money and not when it was earned.

The problem will be getting the company to correct their records.  You can file a complaint with the IRS.

If you do you will need to prove that you did not receive the money until this year.  To what date is the check made out?  What is the post mark?  Was three any tracking on the mail that delivered the check?

Good Luck.

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