Is bonus signing income - a royalty income? Is there any difference in paying taxes?
Thanks, am pretty sure it isn't but thought I would ask.
Pam Kelly
In Texas I think it is considered regular income.
For the IRS, mine was considered as regular income.
And depending on how old you are and how large the bonus check is/was, your medicare deduction may take a hit too.
Declare both royalty and bonus income on Schedule E of your federal income tax return.
For royalty income, be sure to drop in the gross royalty, then show the deduction of severance taxes and other deductions, if any, which were subtracted on your check stub. That way, you can take 15% depletion allowance on the gross, rather than the net. In other words, you want your 15% depletion allowance calculated on the larger number. Bonus income, on the other hand, is entered as rental income, and you don't get to subtract the 15% depletion allowance.
Be sure to report the income shown on your Form 1099's each year. It means that you calculate the royalty and bonus income for the year depending on the date of the check, not the date your received it. If you try to balance to your bank deposits each year, for example, you will need to adjust for checks dated in December and not received until January, and these timing differences can occur at both the beginning and the end of the tax year. If your royalty and bonus income don't tie to the numbers on Forms 1099, you are more likely to get an inquiry or an audit from the IRS. Examine the Forms 1099 as they arrive, and if any are wrong, especially if income is higher than actual, call the company right away to ask for a corrective Form 1099.
You can subtract out-of-pocket expenses attributable to the Schedule E income. I subtract NARO dues, DrillingInfo.com fee, FedEx overnight mailking, copying at FedEx/Kinko, maps bought from Midland Map Company. Also I keep a detailed log of toll calls and deduct that expense. Once I bought an expensive huge locking ring binder which I would be using forever for my oil and gas reference notebook, so I deducted it as office supplies. I don't try anything fancy such as home office deduction because I use my home office for other things. The Schedule E layout wants you to drop each out-of-pocket item in the column for a specific property. I have multiple tracts and if the expense is easy to attribute to a specific tract I drop it in that column; otherwise, I drop the expenses in against the tract producing the largest income. I generally enclose an exhibit showing exact details of the out-of-pocket expenses, indicating whether I have a receipt for each (i.e. I don't enclose copies of the receipts but rather I indicate on my exhibit that I do have the receipt in my file), so as to reduce likelihood of inquiry or audit. I file federal and two states, by the way--my state of residence, as well as the state where the mineral interests are located. "Ugh" is right.
You probably already realize the IRS website easily allows you to open up Schedule E and take a look at it, or print it to paper.
There is continual pressure from some politicians in Congress (and the current occupant of the WH) to eliminate the 15% depletion allowance. You can join National Association of Royalty Members, and make additional contributions to their lobbying arm, if you want to do help.
Yes bonus signing income is taxable income. If it is a result of a signing lease, it is the same as rental income, in other words taxable ordinary income. On the other hand If you sell a retained royality interest (or portion thereof) that transaction would qualify as a capital gain transaction currently subject to the maximum !5% capital gains rate.
Out of State, Thanks for the information. I had to hire an attorney to squeeze my bonus out of the operator. I'm thinking I can deduct this but probably have to itemize to do so. My mortgage interest has dropped to a level that it is no longer beneficial to itemize. Am I out of luck on the attorney fee deduction? Thanks.
Keep in mind: Bonus income is not royalty income. It is considered as rental income and generally would require a separate Schedule E for that property. Check your 1099 - you should get one. The box for rentals would indicate such. It is taxed as ordinary income - both state and Federal (unless there is no state income for the state in which the property is located). Since I am assuming there is no production from the lease yet, the rental income is not included in the income subject to depletion.
You can deduct the attorneys' fees on Schedule E. I took such a deduction in 2010.
Michael Hutchison said:
Out of State, Thanks for the information. I had to hire an attorney to squeeze my bonus out of the operator. I'm thinking I can deduct this but probably have to itemize to do so. My mortgage interest has dropped to a level that it is no longer beneficial to itemize. Am I out of luck on the attorney fee deduction? Thanks.
Thank you Out of State! I have been fiddling with my taxes (and my sister's) for two days now. I, too, have to file a federal return and two state returns. I tried to get some info from the Montana tax help line (ha!) but was still confused by the answer I got. She tried to tell me that the Severance Tax wasn't deductible. I couldn't find anything in the MT tax instructions or forms of what was allowed and what wasn't. The other thing is Montana began collecting income tax withholding on royalties. So I have a large tax amount that is the Severance Tax, etc. and a little amount that is the income tax withholding on the substitute 1099MISC I received from the oil company. My tax accountant has been taking only the larger amount, but now I wonder if something shouldn't have been done with the income tax withholding amount. The question is WHAT? So, anyone out there know?
The Montana withholding amount should show up on your Montana tax return as a tax payment just like withholding applicable to wages would. If your tax accountant can't answer these questions or doen't know the answer to these questions, I suggest you find a new one -- FAST.
Thanks.
6th Generation Texan said:
You can deduct the attorneys' fees on Schedule E. I took such a deduction in 2010.
Michael Hutchison said:Out of State, Thanks for the information. I had to hire an attorney to squeeze my bonus out of the operator. I'm thinking I can deduct this but probably have to itemize to do so. My mortgage interest has dropped to a level that it is no longer beneficial to itemize. Am I out of luck on the attorney fee deduction? Thanks.
For OKLAHOMA residents, keep in mind that the lease bonus IS eligible for depletion on Oklahoma income state returns only (not federal).
http://www.tax.ok.gov/it2011/514Pkt-11.pdf
Lease bonus
received is considered income subject to depletion. If
depletion is claimed on a lease bonus and no income is
received as a result of non-producing properties, upon
expiration of the lease, such depletion must be restored.
A complete schedule by property must be furnished.
Medicare:
Yep, in addition to paying a heap of taxes for "regular income" your medicare will probably double next year. I got my lease in 2010, paid those taxes in March of 2011. January 2012, my wife and I are both on medicare and each of us are getting a hit from $99 a month last year to $199 a month this year. I could say more but it would just get me in trouble!
fayettenative said:
For the IRS, mine was considered as regular income.
And depending on how old you are and how large the bonus check is/was, your medicare deduction may take a hit too.
Re legal fees. I also deduct legal fees on Schedule E. Enter on Line 10 which is labeled "Legal and other professional fees".
Re state income tax withholding. State severance taxes are entered on Line 16 of Schedule E and thus reduce the portion of royalty income that is subject to federal income tax. State income taxes do not get dropped onto Schedule E. If you itemize, you may be able to deduct state income taxes paid on Schedule A.
I generally prepare several workpapers to balance and reconcile Schedule E numbers every which way forward and back and sideways and upside down:
gross royalty income which generally appears on the 1099's, but not always. If it doesn't appear, i.e. if they are only showing royalty income net of severance taxes, then I go back to the stubs and prepare a worksheet to come up with gross royalty;
severance taxes and deductions for gas processing and so on which are deductions on the check stub and are deductible on Schedule E, i.e. they lessen the amount of royalty income subject to FIT;
state income taxes withtheld, if any, which are deductions on check stubs but are not deductible on Schedule E;
out of pocket expenses such as FedEx, copies of documents I order from County Clerk, phone calls, legal, etc.
depletion allowance which I am careful to calculate on gross royalty, not the net check amounts.
The general concept is: I make sure that gross royalty minus tax-deductible check deductions minus state income tax withholdings equals the amount of all the net cash received. Then I make sure that cash received minus out-of-pocket expenses and minus depletion expense equals the net taxable income amount at the bottom of Schedule E (which is carried to the front of Form 1040). I have income from over a dozen payors, so in addition to all this balancing from top row down to bottom row, I am spreading across multiple columns, i.e. one column per payor. The Schedule A is set up for one column per property, but it’s much better to do one column per payor so the IRS can balance to each Form 1099. In my case I show the details on a separate sheet of paper which I enclose as an exhibit, and I show just the totals under Column A of the Schedule E. At the top I describe “A” as “mineral interests in New Mexico--SEE EXHIBIT”.
My background is accounting (altho I am not a CPA), and I have become pretty adept at WordPerfect tables, and I do my own tax returns, so I am able to work and test all these numbers until I am satisfied they are correct. And I generally enclose exhibits with the tax returns which demonstrate the correctness and that the numbers do indeed derive from the Forms 1099. Generally I try to provide enough details on my exhibits so that the IRS doesn’t need to write me for additional information.
Here is one wrinkle: What if I paid a big legal bill in November of Year 1 and didn’t get the lease bonus income until Year 2? If I had other royalty or bonus income (on another tract) in Year 1, I would just enter the legal bill against the column for the largest amount of income. If, on the other hand, this were my very first lease, and I had no Schedule E income in Year 1 to subtract that legal bill from, I do not know how I would be able to deduct it.
Out of State,
Thanks for the thorough explanation, I will print and keep it in my tax file.
You are the expert but in the scenario you describe I wouldn't hesitate to make the deduction. The transactions are tied to each other no matter the dates. But then that might be too logical for the IRS.
I listed oil and gas lease and the county and state on Schedule E under the description in "A., then I included the attorney's fees that I paid in the same column under legal and other professional fees.
out of state said:
Re legal fees. I also deduct legal fees on Schedule E. Enter on Line 10 which is labeled "Legal and other professional fees".
Re state income tax withholding. State severance taxes are entered on Line 16 of Schedule E and thus reduce the portion of royalty income that is subject to federal income tax. State income taxes do not get dropped onto Schedule E. If you itemize, you may be able to deduct state income taxes paid on Schedule A.
I generally prepare several workpapers to balance and reconcile Schedule E numbers every which way forward and back and sideways and upside down:
gross royalty income which generally appears on the 1099's, but not always. If it doesn't appear, i.e. if they are only showing royalty income net of severance taxes, then I go back to the stubs and prepare a worksheet to come up with gross royalty;
severance taxes and deductions for gas processing and so on which are deductions on the check stub and are deductible on Schedule E, i.e. they lessen the amount of royalty income subject to FIT;
state income taxes withtheld, if any, which are deductions on check stubs but are not deductible on Schedule E;
out of pocket expenses such as FedEx, copies of documents I order from County Clerk, phone calls, legal, etc.
depletion allowance which I am careful to calculate on gross royalty, not the net check amounts.
The general concept is: I make sure that gross royalty minus tax-deductible check deductions minus state income tax withholdings equals the amount of all the net cash received. Then I make sure that cash received minus out-of-pocket expenses and minus depletion expense equals the net taxable income amount at the bottom of Schedule E (which is carried to the front of Form 1040). I have income from over a dozen payors, so in addition to all this balancing from top row down to bottom row, I am spreading across multiple columns, i.e. one column per payor. The Schedule A is set up for one column per property, but it’s much better to do one column per payor so the IRS can balance to each Form 1099. In my case I show the details on a separate sheet of paper which I enclose as an exhibit, and I show just the totals under Column A of the Schedule E. At the top I describe “A” as “mineral interests in New Mexico--SEE EXHIBIT”.
My background is accounting (altho I am not a CPA), and I have become pretty adept at WordPerfect tables, and I do my own tax returns, so I am able to work and test all these numbers until I am satisfied they are correct. And I generally enclose exhibits with the tax returns which demonstrate the correctness and that the numbers do indeed derive from the Forms 1099. Generally I try to provide enough details on my exhibits so that the IRS doesn’t need to write me for additional information.
Here is one wrinkle: What if I paid a big legal bill in November of Year 1 and didn’t get the lease bonus income until Year 2? If I had other royalty or bonus income (on another tract) in Year 1, I would just enter the legal bill against the column for the largest amount of income. If, on the other hand, this were my very first lease, and I had no Schedule E income in Year 1 to subtract that legal bill from, I do not know how I would be able to deduct it.
thank you, thank you for such a thorough reply. I feel very informed on the issue. I am sorry it took me so long to reply. I want to tell you that the H&R Block 'person' had done my taxes and I owed a huge sum. I said, 'no way, there has to be a better way.' which as you have shown me, saved me a bunch.
Thanks again, Pam
out of state said:
Declare both royalty and bonus income on Schedule E of your federal income tax return.
For royalty income, be sure to drop in the gross royalty, then show the deduction of severance taxes and other deductions, if any, which were subtracted on your check stub. That way, you can take 15% depletion allowance on the gross, rather than the net. In other words, you want your 15% depletion allowance calculated on the larger number. Bonus income, on the other hand, is entered as rental income, and you don't get to subtract the 15% depletion allowance.
Be sure to report the income shown on your Form 1099's each year. It means that you calculate the royalty and bonus income for the year depending on the date of the check, not the date your received it. If you try to balance to your bank deposits each year, for example, you will need to adjust for checks dated in December and not received until January, and these timing differences can occur at both the beginning and the end of the tax year. If your royalty and bonus income don't tie to the numbers on Forms 1099, you are more likely to get an inquiry or an audit from the IRS. Examine the Forms 1099 as they arrive, and if any are wrong, especially if income is higher than actual, call the company right away to ask for a corrective Form 1099.
You can subtract out-of-pocket expenses attributable to the Schedule E income. I subtract NARO dues, DrillingInfo.com fee, FedEx overnight mailking, copying at FedEx/Kinko, maps bought from Midland Map Company. Also I keep a detailed log of toll calls and deduct that expense. Once I bought an expensive huge locking ring binder which I would be using forever for my oil and gas reference notebook, so I deducted it as office supplies. I don't try anything fancy such as home office deduction because I use my home office for other things. The Schedule E layout wants you to drop each out-of-pocket item in the column for a specific property. I have multiple tracts and if the expense is easy to attribute to a specific tract I drop it in that column; otherwise, I drop the expenses in against the tract producing the largest income. I generally enclose an exhibit showing exact details of the out-of-pocket expenses, indicating whether I have a receipt for each (i.e. I don't enclose copies of the receipts but rather I indicate on my exhibit that I do have the receipt in my file), so as to reduce likelihood of inquiry or audit. I file federal and two states, by the way--my state of residence, as well as the state where the mineral interests are located. "Ugh" is right.
You probably already realize the IRS website easily allows you to open up Schedule E and take a look at it, or print it to paper.
There is continual pressure from some politicians in Congress (and the current occupant of the WH) to eliminate the 15% depletion allowance. You can join National Association of Royalty Members, and make additional contributions to their lobbying arm, if you want to do help.
Unsure if anyone is out there to respond considering I am typing in 2014. The last entry appeared to be Feb 2012.
2 siblings and myself received royalties in 2013 and expect it to continue. In the dark totally regarding filing of taxes, on the surface for the first time in 40 years of filing taxes I will be paying a huge/whopping amount back to the IRS unless I get help regarding filing depletion it appears.
My understanding is that the amount shown on my 1099-Misc for gross royalties allows a 15% depletion or similar. Basic tax software allows the introduction of the 1099-Misc amount but WHERE does one file the Depletion? The volume/s of info provided by the IRS is taxing (pardon the pun) and the head is swimming at this time. Schedule E has been identified. So has Schedule C for Profit/Loss but I am receiving income....not selling or losing to warrant capital gains, etc.
Is anyone out there that can assist me with getting down to the nitty gritty and provide a heads-up where to look for an example? Unbelievable that an oil company, no matter who they are, couldn't provide a generic instruction form to assist any new Royalty recipient. As it is I took a trip to a local H&R office, pointing out ahead of time I wanted to talk solely to a person who had dealt with royalties or depletion in the past only to sit there for 1.5 hours while the 40 year veteran fumbled through IRS info that I could have done at home.
Appreciating as would anyone looking at this site helpful suggestions!
I use Turbo tax version with rents and royalties but I believe the schedule E is the place. You can deduct the 15% depletion and any expenses you paid or the company withheld from your royalty including and property tax you paid (true for WV not sure for other states) and any expenses you had such as postage to mail a certified letter to the company etc. I am not an attorney or an accountant but have done several years of paying taxes on royalties and have researched this.
Thanks for the quick reply.....it seems that I went thru sch E...using H&R block for the last 3 years I switched from TT. I'm just sooo in the dark for realizing you input the 1099-misc income and believe it needs to be shown in entirety. I just do not or did not see a spot on the Sch E where it points to listing the 15% there. For example...if the 1099Misc royalty is $10,000....15% is 1500. Do you put the $1500 on the form? I just didn't think you would substitute the $1500 for the income shown on the 1099 Misc. I have never been audited and can't see why 2014 would change if I can input it correctly. It appears then that you did not also fill out a schedule C....if that is the case then I could stay with the basic software I believe.