We just started receiving production distribution over the past few months. Will we receive a Annual Royalties statement for 2018 for our tax preparation?
You will receive a 1099 from the operator reporting your royalty income which is reported on Schedule E. Some forms list the gross and net revenues and others do not. You can take percentage depletion on the gross income and then deduct the severance tax and any other deductions. You also deduct you property taxes on schedule E and other related expenses. Many mineral owners keep a spreadsheet of the gross income, severance taxes, costs, and net income for the wells on each check to be sure that they maximize the depletion deduction. If state income tax is deducted, then that is a credit against your state income tax on the royalties. Your CPA can help you with this.
Great info, Thanks 2 questions- What is a Severance Tax and our CPA (on the East Coast) may not be familiar with the device you describe for state tax credits on royalties (Since Texas gets a good chunk up front). Does this $ vehicle have a name or a link to more info? Thanks again!
I did not know in which state your minerals are located. Texas has no state income tax and so you will not file a state tax return. You will only have to file a tax return for your own state of residence. Severance tax is deducted on your check stub. When you look at the figures across the check lines, you should see a gross revenues for oil (and gas and products/liquids), severance tax deduction, maybe charges such as transportation, gathering, processing, marketing (mostly for gas only). Then the figures should net on the far right column. Oil and gas are reported separately. If it is a gas well, then the oil will be called condensate. Some operators breach out the liquid products from the gas and others consolidate into gas only. Severance tax can be thought of as akin to a sales tax to the State. It is 4.6% of oil sales and 7.5% of gas sales. (Plus a tiny amount per bbl or mcf). If your minerals are located in states such as Oklahoma, New Mexico, etc which have income taxes, then you would need to file a state income tax return in that state and pay state income taxes. If the operator deducted Oklahoma state income tax from your royalties, then you would get a credit for the deducted taxes against what you owe. Your CPA should be familiar with state income tax returns and the interaction of the data on them.