I am not sure how to ask this question so please be patient. We are at the age of caring for our parents. We are helping my mother in law take care of her finances and such. I have been learning as much as I can about the royalties. I have discovered that she has never used her statements for filing taxes. She has always used HR Block to prepare her taxes. She only gives them her 1099. It appears that she should have been using her statements in order to write off the expenses and tax deductions on the statements. I need some suggestion on this please.
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It would be probably more helpful to hire a CPA who is used to oil and gas to file her taxes. She could be taking depreciation and getting credit for some of the expenses. Save all of the statements from the checks for seven years. The CPA needs those for the tax work to have all of the information needed. The 1099’s are gross income and not as helpful (and sometimes incorrect). If you have the statements, the CPA might be able to make amended returns for the last few years to claim some of the expenses (a bit out of my wheelhouse), Never hurts to ask if that is a possibility.
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The 1099’s only show gross income and does not have any deductions. Should be using her statements in order to file taxes correctly? Should we hire a CPA to take care of her taxes?
Thank You, not sure if I can find all of the statements though. I am in Energylink, it only goes back to March 2020.
You may only be able to go forward. Or you can politely ask the operators for back statements. They may or may not be willing to supply them. Your mom may have to ask if you do not have a POA. (Power of Attorney).
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I look at my 1099’s from XTO/Exxon on EneryLink. The 1099 only shows gross but there is a page 2 that shows total tax and deductions. There is a separate 1099 for interest. The interesting part is that if you subtract tax and deductions from gross and add back interest it does not equal Net $. About a $145 difference.
When I got the 1099’s in the mail they show the same BUT on the back of the royalty 1099 page it has the missing $'s listed as “reimbursements”. I’m not sure what “reimbursements” are but all the pieces are there.
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So far one operator has been kind enough to send me the statements. I didn’t see the info on the 1099 that you spoke about. Working on getting a CPA.
I’ve been a CPA for 34 years. Oil and gas specialization.
You need to use gross on 1099. Most 1099s provide Severance Tax and Other Deducts (transportation and Marketing, when applicable).
If a 1099 does not you can go to the December statement and get those deductions.
If statements are not available I always estimate taxes. Not material and IRS doesn’t care. I use 5%. It’s close enough. Trust me.
Then take the Percentage Depletion deduction of 15% of the GROSS royalties on Schedule E.
That’s it.
Royalty income is not a Qualified Trade or Business and thus not Active Income. Nor is it Passive Income to offset Passive Losses. It’s Portfolio Income, like interest and dividends. That said it’s aggressive to take additional expenses like travel, office, phone. But people do it. Low risk of audit. And then you might win. Need a phone to talk to Operators. That’s pretty easy. A trip or two to visit the well sites. Otho g illegal in those deductions. Just “gray”. Tax savings are not huge. On $1,000 most likely $150 to $240 max would be $400. If you can demonstrate need for phone etc do it and don’t look back. Irs has no clue and no manpower.
Hope this helps.
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I just signed up & saw this. I wonder how much we get taken advantage of with these companies. I an getting royalties from Hess & Sinclair. I went through some of my statement & until 2015 they took out very little deductions. Then they started taking out a lot more. I just looked at a random statement. It looks like roughly 10% taxes but the deductions are close to 20% Only Hess does that.
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This is a 1099 with the breakdown from 2020 from Hess.
State gross fed w/h State w/h sev/prod taxes deductions net ND US 73,835.94/ 0.00 1,587.58 4,112.30 20,679.02 47,457.04
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Good question…do some research…mine has found 15% for depletion from gross revenue in Schedule E. And i believe 3-5% is reasonable for production cosys and managent fees. I have seen 22% mentioned.
One reason why charges have increased is that the operators are selling gas after processing at the plant, rather than at the well to a pipeline company. Accordingly, they deduct transportation and other costs from the well until the point of sale. The exception is if your lease contains the exact legal wording necessary to stop all or some of the charges. And state law can affect the cost deductions. Also, some companies deduct the expenses from the reported gross sales, so that you do not see the costs. If you are in Texas, be sure to deduct your property taxes and other direct costs such as certified mail, etc. on Schedule E.
It just seem odd that one company deducts so much more than the other when the wells are side by side. This is in the Baaken BTW.
Update. It was well worth going back and amending taxes using the statements. Will soon be hiring a CPA. Does anybody know where I can find instruction on starting a spread sheet for statements?
See if your operator uses Energy Link. They should. If so you can download statements in Excel Format and then format till your heart’s content. Please let me know if you can get access through Energy Link. If not happy to forward you something I’ve used in the past depending on the data points that are important to you
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Yes, we have access to EnergyLink. We haven’t started asking for Excel format yet. Mainly looking for best practices and use of the Excel files specifically for taxes and auditing the statements. I will be handing this over to my husband to to excel and formatting, it’s not specialty.
All the cpa needs is the 1099. On rare occasions the 1099 will not show deducts - mom and pop operators- and only them does a cpa care about or even want the Run Statements.
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Energy Link has Excel Download. No best practices. Volumes. Production monthsGross. Severance Taxes. Other. Net.
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