You negotiate your contract for a ROW and pipeline to cross your land. The land agent tells you that the money you receive can be considered payment for damages. The document from the midstream company lists the payment as damages. Tax time arrives....how do you proceed? The midstream company sent you a 1099-misc showing the amount they reported to the IRS. The confusion soon follows. Is this money taxable or not? Ask 5 "tax professionals" and you'll get 5 different answers.
Is there such a thing as damages. Tell your accountant or local H&R Block tax person that these damages aren't taxable and they'll look at you like you're crazy.
Let's settle this once and for all. Let's hear your comments. Are damages taxable???
I'll repeat it again, how are you being damaged? If the company has the right to condemn, then you need a letter from the company stating just that. Then all of the easment money is not taxable, it is a taking, just as if the government took it themselves. On the other hand, if the company does NOT have the right to condemn, then you could have told them to go fly a kite and go around you. BUT, if they made you an offer you couldn't refuse, then every stinking dollar is taxable according to the IRS field agents we had talk to us. Damage money is just a name and by all rights should be one money including crop payments and timber. It isn't that complicated.
I'll tell you a funny story; a big rancher in Texas many years ago got into a condemnation fight with Exxon over what the appraised value of his west Texas desert lands were worth. Exxon used the assessor value of $40/acre and said the highest and best use of the property was cattle range land. The rancher argued that because of all the previous payments from non-eminent domain pipeline companies, his land was worth $400/acre and thus the lands highest and best use was for pipelines, not cattle grazing. The judge ruled in favor of the rancher and he got his $400/acre. The next year, his assessment went to $400/acre and his tax bill was so high, he went bankrupt. A word to the wise that these county assessors are not stupid and read the writing on the wall.
if you get a 1099 you must report the income. however, you can deduct damages as an expense from that payment.
When you receive your 1099 for royalty, a lot of companies include any processing and transportation costs that they paid on your behalf and the 1099 is for the actual royalty you received plus these costs. You must report what the 1099 shows and then deduct transportation and processing costs. It's the exact same thing.
If you get a 1099 from the pipeline company, it was reported to the IRS.The damages are taxable. I went through this in 2012. The pipeline company sent me a 1099-S for the right-of-way and a separate 1099-MISC for the timber that was damaged. I ended up giving the tax account a copy of the 1099's and a copy of the two checks and the check stubs. I also gave them a copy of the "Easement and Right of Way Agreement ADDENDMENT List" with the "Disturbance" and Marketable Timber" paragraphs circled. The total amounts are then entered on Line 21 of the 1040 with a note that it is "Pipeline Damages". This finally ended the controversy about it as far as the IRS was concerned.
Before it was resolved, IRS had me owing over $2,000 in additional taxes.
Here's a good one. I heard of this happening. A landowner when filing taxes reported all of his income and showed documents where damages were paid to him. The tax professional prepared his taxes and deducted the damages from the total income. This happened a few years ago. This guy goes back to the same tax office to get his current taxes done and the tax professional he is dealing with now looked back at his taxes where the damages income wasn't reported and tells him it wasn't done correctly and he should've paid taxes on that income. What's he to do? The tax professional did his taxes and agreed to the damages. He merely presented the documents he had, but they made the final decision. On who does the blame lay? How is the situation remedied?
Sounds to me like,if the Infernal Revenue Service is going to count the ROW agreement $$$ as income,Even if they say it was for damages,then you're gonna need to prove in writing just what those damages are and how much the damages to your property is worth. If there are no proven damages,then yea,thats income. I'd say in a lot of cases,the damages to the land and the property's value is probably worth more than what the pipeline gave for "damages".At that point,you have a "loss" ,not a gain. Just gotta prove it,somehow.
Just sayin' that all tax preparers are not created equal and it is my understanding that individuals can do taxes without passing any type of exam or licensing, you know like the ones many of the tax businesses employ.
Now a CPA does have to pass an exam, next question is does he/she have experience preparing taxes
when they involve oil, gas, and pipeline issues?
I hope we are all learning to ask lots of questions of the professionals we are paying money to.
lol I lucked out as my former CPA with little o and g experience retired and I was forced to find a new one who has good experience in o and g.
I'm sure everyone will agree that the most disgusting part of our windfall is the amount we have to pay in taxes. It's terrible. The tax rates are akin to highway robbery. Just my opinion !!!
It starts on how you negotiated the ROW in the beginning.
If you negotiated this issue upfront, you would've asked for any compensation to be paid as damages and any remaining portion as ordinary income.
Any decent tax pro already knows this, or can quickly find it out. There should be little or no disagreement among truly qualified tax pros...I consult with both "enrolled agents" and the occasional tax attorney for these sorts of things. Plus one can google the forms and instructions from the IRS online.
The damages portion will NOT be taxable if you negotiate the ROW that way from the beginning.
That portion of damages will, however, reduce your "basis" in the property, which you have to document, should you get audited.
Any remaining compensation will be taxed as ordinary income.
Make sure the correct box is marked when you get the 1099misc or possibly a 1099S.
The IRS will expect your return to clearly acknowledge and match the info given by the ROW grantee.
With all the pipelines still being installed, more people need to be considering this - dont' just negotiate price, but add terms and conditions, PLUS how the payment is to be treated: mostly as damages if you can negotiate that.
Put another way, the IRS understands that payment for damages just makes you "whole" again...it's not a taxable event if it's done correctly.
INVICTUS....I hear what you're say and I agree with you.....BUT, some of these overzealous tax people want to try and tax you on anything and everything. You mention damages and it's like you're try to scam them. Like I mentioned earlier, if you talk to 5 different tax people....you'll get 5 different answers. It seems to be the "luck of the draw" and that is finding a tax person who agrees with you on how damages are viewed. Another thing, I don't see how the "basis" in the property can even be used nowadays, considering the value of these mineral rights. If the "basis" is used, it should be on mineral value too not just land value.