Some of my royalty checks from oil companies have deductions for things like transportation, marketing, gathering, etc. There are also deductions for various types of taxes. May I take these deductions and taxes on the Federal form 1065? My royalty checks come to my LLC.
If this is your first year filing for your LLC, then you should consult a tax CPA to make sure that you understand the requirements. Generally, Form 1065 is used for a multi-member LLC reporting as a partnership and single-member LLCs report directly on Form 1040, on Schedule C or E, depending on type of income. The 1065 will require beginning-of-the-year and end-of-the-year balance sheets, with M-1 and M-2 reconciliations and other information, which can be tricky if you are not experienced with that form. Then a K-1 will go to each partner to report on personal returns. Expenses are deductible, including depletion, whether you report on Form 1065 or on Form 1040.
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I’m not a CPA, but you have two choices: gross up the income and then take the deductions to get to your net income; or show the net income. The 1099s you will be sent might be gross or they may be net, so you need to be cognizant of each of those. All companies do it differently.
The reason to always use gross income and then deduct the expenses is because the percentage depletion is 15% of gross royalties.
Excellent point, TennisDaze.
When I Google depletion allowance it shows 22% in Oklahoma. Is that correct?
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