I signed a division order (Pioneer) in Dec23 due to new horizontal wells coming on line and received a large check in early Jan24 for around 6 mos of 2023 production. I assumed that I would owe Fed tax on that production in tax yr 2024, especially since it wasn’t included on the 2023 1099-misc. Now that I’ve started more serious tax planning for 2024 I thought it best if I confirm that assumption. Can anyone chime in? By the way, I’m a relative newb to O&G royalties and this is my first post. Already learned a lot by lurking… depletion deduction for one.
You are correct. Oil company will report on 1099 for year royalties are paid, matching dates on checks. So January 2024 check royalties are taxed in 2024.
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Not a CPA, and hope one will correct me if they disagree. But my understanding is, if you are on a cash accounting basis, then you report income, including royalties, in the year it’s received. If that income wasn’t included on the 1099 you received for 2023 you wouldn’t have a basis for reporting it in 2023 and would probably be inviting an IRS audit letter when their computers didn’t match your Sch E numbers with the 1099 the producer filed. In the same way you would report corrections in royalty payments that relate to production in a prior year in the year the correction is received rather than having to file an amended return for that prior period.
If you’ll use the Looking Glass feature at the top right of the page you should be able to find lots of previous posts about reporting royalty income. One tip is to make sure you understand how the operator is reflecting taxes and production expenses on their 1099’s. Some report the gross royalty amount and force you to come up with the expenses you can deduct.
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