Tax treatment of unleased Coleman’s income

Accounting and Taxes
1

I am a unleased co-tenant in oil and gas wells in Reeves county Texas. I am receiving income from these wells. How should this income be reported for tax purposes? Royalty income or non employment income as shown on a1099 NEC form?

2

Since the minerals are not under lease, then you are treated as a working interest owner for tax purposes. You will receive a 1099-NEC and report on Schedule C. You will have revenue, taxes and expenses, including the JIB (joint interest billing) expenses that you have paid. Your CPA can advise you as to other deductions which can be taken on Schedule C.

3

Thanks for the reply. So the fact I have no say so in the day to day operations and no input to any of the operations I am still on the hook for self employment income? Intuitively that doesn’t seem like the right answer but it is how the Vompany is reporting it on the 1099

Thanks again for the input.

4

When you elect not to lease, you are essentially on the same basis as other non-operating working interests, who participate in well. Most of them are lessees of leases from other mineral owners. Operator has responsibility for operations and decisions to ensure that the well keeps producing and maximizes revenues for all parties. It is like any other business. You cannot have 15 presidents all making different and opposing decisions on the same matter.

5

Working interest income is earned income under federal tax code and the operator is correct to issue 1099-NEC.

6

The bright side is that being a working interest owner has many tax advantages. The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains. Plus, you have a depletion allowance of 15% of all gross income from oil and gas wells. In general, a working interest is more beneficial tax wise because you’re going to get a lot of expense deductions.

7

Since this is considered self-employment income (1099 NEC), it can be considered for SEP IRA and Solo401K contributions since it is Schedule C income.