Part of the proposed tax bill apparently includes eliminating the 15% percentage depletion allowance that royalty owners get to deduct on their tax returns. So in other words, real estate developers will get to depreciate their deteriorating improvements, but you will not get no deduction for your mineral assets being depleted. Apparently mineral owners are being lumped in with “big oil subsidies”, with no one pushing this bill courageous enough to point out the difference. The funny thing (if you cannot cry then laugh?) is that percentage depletion was eliminated for big producers in the 1970s and is only currently available to small operators and royalty owners.
Below is NARO’s response on testimony they are submitting to the Senate Finance Committee.
Thank you. I wrote to both of my Senators in Arizona to urge them to keep the percentage depletion allowance. I also sent copies of my email to family members who also have royalty interests.
That is excellent testimony by NARO clearly laying out how middle income royalty owners will be impacted, which goes against President Biden’s promise not to raise taxes on anyone making less than $400K/ year. It seems that part of the bill could easily be modified.
Thanks Wade for bringing this to our attention. I know I am late reading this, but good info and yes it does affect the little guys that have small holdings and small amounts of income as we age.
Many thanks,
MK
Elections do have consequences. Good thing we have the tax and spend Socialist Liberals in charge to ensure that any money we make gets taxed to a point where there is very little left to the leaseholder.
Here is the letter NARO and 37 other organizations sent to Congress about the foolishness of eliminating percentage depletion allowance. IF YOU ARE INCLINED TO CALL THE DEMOCRATIC REPRESENTATIVES AND SENATORS IN YOUR STATE YOU NEED TO DO SO ASAP. THE LETTER HAS A LOT OF GOOD TALKING POINTS, BUT OTHERS ARE:
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Percentage Depletion Allowance is the same concept as depreciation for real estate investors
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The vast majority of the millions of mineral owners who get royalties make less than $1000/mo
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This is a 15% tax increase on the royalties of millions of Americans making less than $400,000/year
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Eliminating percentage depletion will lead to more abandoned wells
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Trying to impose capital gains taxes on death even if the property has not sold will cause sales of family farms, ranches, and minerals
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Most of those that will have to sell to pay capital gains are small, thinly capitalized owners who don’t have the cash to pay the taxes
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The buyers of these family minerals will be big mineral buying hedge funds, which will increase wealth inequality
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We should not be raising taxes when it will drive production overseas and we will lose our energy independence
Some good news out of Ways and Means in the House. Eliminating percentage depletion allowance, and imposing capital gains on death even if the property has not been sold are out of the current markup. We also understand 1031 exchanges are out. Estate Tax caps will go from $11.5 million to $5 million per person, and capital gains and tax bracket increases are still in. That only scratches the surface. See the attachment for a summary.
There are no guarantees they could not slip these back in, so we need to keep up pressure on the House. However, the focus will swing back to the Senate to make sure these are not included in anything that comes out of the Senate also.
Percentage depletion elimination was not in the draft released by the House Ways and Means Committee. Neither was the imposition of capital gains on death even when the property has not been sold. However, we need to keep the pressure on both the House and Senate to make sure it does not get put back in during the horse trading going on currently.
I assume everyone saw that Build Back Better is in trouble thanks to Sen. Manchin (a thank you note may be in order). Sen. Schumer is threatening to put it up for a vote after Jan. 1 to force Manchin to cast a vote.
The drafts of BBB still circulating do not contain a percentage depletion repeal. That does not mean it could not get thrown back in in some last minute compromise, so stay vigilant, although it is looking better that percentage depletion is safe. That doesn’t mean there are not other parts that would still affect mineral owners, the proposed methane tax being the primary one.
Apparently not understanding this may be a good time to encourage American energy production, President Biden’s budget proposal basically resurrects all the tax provisions targeting oil and gas that were stripped out of Build Back Better, including elimination of the depletion allowance.
The mixed signals this administration continues to send to industry, and therefore the world and our allies, are astounding. Are we going to help Europe and the rest of the world escape reliance on Russian oil and gas or aren’t we? Time to prioritize Midland over Moscow.