Do mineral right owners qualify for a depletion allowance on oil and natural gas royalties? If so, how much is it?
Dear Mr.von Proctor,
In 99% of the time, you would qualify for a depletion allowance. You may either have percentage depletion or cost depletion. Percentage depletion (at the present time) is 15%. Cost depletion will depend on your basis.
Check with your accountant or tax advisor.
In addition to federal depletion allowance of 15%, states that levy income taxes have varying amounts of depletion allowance. Oklahoma, for example, has a depletion allowance of 22%.
Percentage depletion is a gift that "keeps on giving". In other words, this continues year after year without limit. For most properties, this is the accounting technique used. (If you had a high cost basis in a property, and only had minimal produciton, you might consider cost depletion.)
Thank you for the information!
Does Bentonite qualify for the depletion allowance?
Note that the depletion allowance is 15% of gross, i.e. 15% of your royalty income before subtraction of severance taxes, before subtraction of deductions such as transportation, and also before any state or federal income taxes are subtracted.
Most years I have one or two Forms 1099 that don't show the gross, so I go back to the check stubs to get the information for my calculation of gross. (I include a detailed workpaper as an Exhibit to Schedule E, showing how all the numbers on the 1099's tie to my numbers.)
Is the 15% depletion allowed on signing bonus. I ask because I've been told yes and no, My cpa sez no because the 1099 list it as rent and the 1099 provider sez to their knowledge half of their MOs use it and half do not.
Federal reg book 535 to my understanding allows the depletion, Anybody have Knowledge on this.
Mr. Henry, I would say your CPA has the right of it. Your property has not suffered depletion just because you signed a lease, which may run it's course and expire without drilling/production, leaving your mineral estate in exactly the same condition as it was before you leased it.
Federal depletion is NOT allowed on a signing bonus, period. However, in the state of Oklahoma, lease bonus is considered income for purposes of depletion on the STATE income taxes only.
mike henry said:
Is the 15% depletion allowed on signing bonus. I ask because I've been told yes and no, My cpa sez no because the 1099 list it as rent and the 1099 provider sez to their knowledge half of their MOs use it and half do not.
Federal reg book 535 to my understanding allows the depletion, Anybody have Knowledge on this.
I understand what you are saying however I'm fortunate to be producing on 2 of 3 leases and the remaining one
has a well on confidential status with 2yrs remaining on lease. It's in williams co. ND so I fell good it should produce something prior to end of lease ( wells around it avg 200- 450 bopd ). Knowing this what do you think,
What would be the 1% of the time that you wouldn't qualify? Good stuff!
Buddy Cotten said:
Dear Mr.von Proctor,
In 99% of the time, you would qualify for a depletion allowance. You may either have percentage depletion or cost depletion. Percentage depletion (at the present time) is 15%. Cost depletion will depend on your basis.
Check with your accountant or tax advisor.
Best,
Buddy Cotten
Mineral Management
Good point for Oklahoma. I understand that you have to pay it back if no production occours.
I didn't drag this thread up but it's probably timely for procrastinators. Oops, I guess I did by clicking the link to come here, my mistake.
JW Anderson said:
Federal depletion is NOT allowed on a signing bonus, period. However, in the state of Oklahoma, lease bonus is considered income for purposes of depletion on the STATE income taxes only.
mike henry said:Is the 15% depletion allowed on signing bonus. I ask because I've been told yes and no, My cpa sez no because the 1099 list it as rent and the 1099 provider sez to their knowledge half of their MOs use it and half do not.
Federal reg book 535 to my understanding allows the depletion, Anybody have Knowledge on this.
I thought I read that I could deduct related legal cost related to my depletion deduction. For example, I had legal costs related to a dispute in the lease terms after the lease was executed during the year where I received royalties. Basically I had to fight to get paid based on the terms of my lease.
If I take the percent depletion, can I still deduct the legal costs for the year???
Jay, I would say talk to a CPA, legal fees incurred should be deductable.
my assumption is that this only o persons that own the land, i only have royalty interest so that dosnt apply or does it?
Buddy Cotten said:
Dear Mr.von Proctor,
In 99% of the time, you would qualify for a depletion allowance. You may either have percentage depletion or cost depletion. Percentage depletion (at the present time) is 15%. Cost depletion will depend on your basis.
Check with your accountant or tax advisor.
Best,
Buddy Cotten
Mineral Management
Itemizing has no bearing on Schedule E
Pete Wrench said:
Yes, the depletion allowance currently is 15%, and it is claimed on Schedule E, Line 17 or 18. I guess if you don't itemize you cannot claim the depletion deduction.
We own the mineral rights in TX. Accountant told us 15% depletion on royalties. I looked at IRS Pub 525. It says some wells can claim up to 50% depletion of royalties. Do you know anything about this?
Buddy Cotten said:
Dear Mr.von Proctor,
In 99% of the time, you would qualify for a depletion allowance. You may either have percentage depletion or cost depletion. Percentage depletion (at the present time) is 15%. Cost depletion will depend on your basis.
Check with your accountant or tax advisor.
Best,
Buddy Cotten
Mineral Management