I've been doing tax returns that included information from 1099 MISCs from XTO, Hess and Continental for years. For 2016 Liberty Resources was added to the mix. XTO, Hess and Continental all list either "taxes" or "SEV/PROD tax" as separate lines on their 1099s (information not included in a box), which can be taken as an expense on schedule E. Liberty Resources only lists "Deductions", which I believe includes both an expense amount and another amount that is not allowed as an expense on schedule E. I called Liberty to find out what the actual "taxes" or "SEV/PROD tax" amount is and they told me that all of the "deductions" amount is an expense for schedule E. This doesn't seem right to me. I only have a tiny amount of royalties so I do taxes myself, otherwise I could ask a tax professional. Anyone else have a similar issue?
For anyone else having this same issue, I just spoke with Mark at the ND State Tax Commission, and he says that ND Extraction Taxes and Severance Taxes are taxes that can be taken as expenses on Schedule E, but ND State Withholding Tax cannot. Unfortunately, the 1099MISC I got from Liberty Resources has them all lumped together as "Deductions" so I am going to go back through all stubs to separate out the amounts. I don't understand how Liberty Resources can get away with reporting this way.
This is unusual. Most companies list gross revenues and deductible expenses (may include severance taxes & costs charged against the revenues) and list state income taxes which have been withheld on Line 16 of the 1099 Misc. This is required on 1099 because state income tax which has been withheld goes to Schedule A, rather than to Schedule E with the income data. Some companies only set out the gross royalties and do not list the severance taxes and other expenses and it is the royalty owner's responsibility to keep track of those. If you do not have any amount listed on Line 16, then most likely you did not have state income tax withheld. In that case, all of the expenses are deductible.