Our last two or three royalty statements have had a lot of value in entries dated 2018 and 2019. Additionally, much of the value is under $ tax field with entries $xxx.xx- No be it these royalty payments are not large by any means - but better than we were expecting courtesy of the NG market. But does it seem likely that these are tax refunds and as such are they taxable income?
Any positive payment will be included in revenues for the year, including reimbursements of severance taxes or costs or positive price adjustments. If these are reversals of previous deductions, then they had reduced your taxable income in 2018 and 2019. Severance taxes are paid on the net of gross sales less any costs (such as transportation, gathering, processing, etc.). Severance taxes could have been overcharged in the past. Or if new costs are charged for prior production months, then there would be a reduction (refund) of related severance tax. Or if oil wells have been reclassified as gas wells (and assigned a new RRC lease id number), then the wells would qualify as high-cost gas wells and have a lower gas severance tax rate. When the operator is reimbursed by the Texas Comptroller for the lower gas severance tax rate for prior months, then you will see those reimbursements on your check detail.
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Thank you for you usual detailed and educational response. all wells and production are NG in our case. Apache did come back and say that if I find in the column “$ taxes” those are refunds. So I guess I will be going through the statements and identifying such. I guess one question for the CPA will be will the “update” to my taxes be undertaken by filing an amended 2018 and 2019 tax return?
The income taxes are based on the year of receipt of royalties, not on the year of production. So the severance tax refunds will be bundled into your 2020 income. No need to amend any prior tax returns.
That makes sense. I went back with spreadsheet and digital copies of the statements for this year and did a little testing. In our case, at least we won’t have to process every number under the column $ taxes. A positive number in the row “Property Total” under " dollar sign taxes" will indicate amount of refund. Previous years had a little bit of that, but not near the level this year has. So I can save the estate’s CPA some billable hours by at least gathering up that information from the statements for 2020. As an FYI, my mother at age 97 passed away May 30. Her 25 percent interest in these wells and surface rights will eventually pass to my brothers and me. In the interim it goes to the estate and we are in the process of getting apache to assign her interests to the estate.
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