We received a check in September for an amount that was double what we expected in this downturn oil situation. The Oil Company sent us a letter saying they double paid us and would be taking out the overpayment over the next two years of drilling. I have no problem with that and believe they probably did overpay, but wonder if there is some other issue I should be thinking of here. Obviously income taxes-- their letter does not ask for a reply or an agreement. I'm assuming they can recoup overpayments in this manner. Anybody ever seen this before?
Who was the operator? When an operator overpays they usually start recovering the over payment immediately with all of the revenue from the overpaid well(s). You would have to pay income taxes on the royalties when received and not the production date.
They are doing that and yes, I'm sure I'll receive a 1099 for income tax. I am just surprised that this could happen.
Payment errors are common. Most of the time is is not in your favor and are not corrected. If this is your first year receiving royalties, if you do not know you have a 15 % depletion allowance.
It's not our first year-- and yes, it is still surprising -
How do you think the 15 % depletion allowance affects this? We inherited our royalty interest-- did not acquire it as an investment.
All owners in an oil and gas well get to take the percentage depletion. If you acquired it in an investment you have a cost depletion. Percentage depletion: Gross royalties times 15% = Depletion Allowance. Gross - Taxes - Expenses - Depletion Allowance = Taxable Income. If Gross is $10,000, Taxes are $750, and Expenses are $1,000. $10,000 times 15% = $1,500 depletion allowance. $10,000 - $750 - $1,000 - $1,500 = $6,750 taxable income.
Since we inherited it, we do not get to take it.
https://www.irs.gov/publications/p535/ch09.html
If you have legal right to income on mineral property you claim the 15% depletion allowance.