Estimated tax calculatiion for royalty

Hi everyone,

This week I received my first royalty check for oil royalties. NG was not reported yet but I'm sure it willl be on next month's check.

Since the second estimated payment will have to be sent in on June 15th I began calculating my royalty income for tax purposes.

My questions are: how do I determine my estimated royalty income since I know that in all likelyhood the oil production will decline througout the remainder of the year?

Also since I have no idea how much NG production there will be, except for the IP, do I wait until actual production begins and then begin paying estimated tax on the 9/15/2011 estimated tax payment?

Thanks for any advice on this topic.


I pay my estimated tax on what I have been paid by the date of the quarterly estimated tax due dates, for federal and state.

It's been four years since my mother received a lease check for her interests in Oil, Natural Gas, and minerals and wells are being built, but she hasn't received any royalties yet. We were told that if she dies, we would have to pay in advance (within 90 days of her passing), inheritance tax on the estimated fair market value of her assets, which include her interests in OGM. Has anyone else run across this?

Thank you in advance.

If you don't mind me asking, how long did you have to wait for your first royalty check?

To answer the question about inheritance tax, yes you will have to pay. My folks have put their interests in a trust so that changes the tax equation. But my cousins have had to go thru this and we are trying to find the best way to value the interests. There seem to be many theories but no methods. The best advice I can think of is to find a good landman and develop a relationship early. Then you will have some place to go when you need advice.

Thanks Rick - I was told by a lawyer that although the “landman” is our first contact and we have built a good relationship with him, that he doesn’t work for us, therefore we needed to hire our own independent OGM appraiser and our own lawyer in OK. As far as the inheritance tax, do you or anyone else know what happens if we don’t have the ability to pay at the time of her passing? I’m thinking the Federal Government would just put a lien against any future royalties until the tax is paid off. This way we still technically “own” the rights, but receive no royalties until Uncle Sam get his share. Anyone’s thoughts on this?

For Rick also - can you tell me what happens when the interests are put into trusts? What’s the difference in the tax equation? Doesn’t Uncle Sam still have to get paid?

The IRS puts out a Pub on this #950. it is worth a look.

See if you are subject or not.

Thank you so much. I will get it ASAP.

Mike said:

The IRS puts out a Pub on this #950. it is worth a look.

See if you are subject or not.


I don't know if the message I started typing made it to you, so I will try again, my mouse pad on the laptop can be pretty sensitive and it appeared to delete it or send it????

We work with CPA Associates and they have offices and experience in several states. I received my first royalty check June 2010. I was told I didn't have to pay estimates unless I was already set up to do so from the 2009 filing. I decided to make quarterly tax payments so I wouldn't be shocked with a large tax bill. I was advised to set aside 30%. My tax bill came in at 28% so it worked out well.

We were advised to set up a bank account just for the trust or (for some an LLC within the trust) and deposit all royalty checks into it. Do not mix your bank accounts. Makes for easier booking. We can write payments to ourselves as needed.

We first went to an attorney that had a CPA background before becoming an attorney specializing in trusts and LLC. That experience was not as fun as depositing a check, but I learned a lot about estate planning and hopefully avoided problems for my kids down the road.

Referencing the estate taxes, I think it would be risky not to have a trust. There are concerns that what companies say is gas % oil reserves and what it ends up actually being could be a nasty surprise in probate court. Without good financial planning, your family members might be shocked with huge inheritance taxes.


Thanks for your response.

I did have a CPA do the numbers for the estimated payments. And we are currently in the process of looking for a referral to an attorney to advise us on trusts, etc.

This is an interesting thread.

I have given considerable thought to minimizing taxes on our pending royalties.

Why not incorporate ?

I am thinking of running all royalties through a "C" Corporation.

When we are asked for a Social Security Number (SSN) for an oil and gas lease, why not provide a EIN number or a corporations federal SSN for the oil and gas lease agreements ?

A Sub-Chapter "S" Corp has a "passive" gross income limit of 25% so this entity will not work for royalties.

A family mineral trust has a lot of extraneous management fees which can be cumbersome.

A "C" Corp. in Texas will cost about $300.00 in annual franchise fees plus another $400.00 for the CPA to do the corporate taxes.

I am wondering if anyone has structured their royalties to run through a "C" Corporation ?

A "C" Corp. provides maximum flexibility and write-off capabilities versus LLC's, SubChapter S's and PC's from my reads. I run a California "C" Corporation as the CEO/President so I am familiar with the tax write-off structures.

I have thought about a Trust managed within a "C" Corporation but after thinking about it, it did not make sense to me.

Is anyone using a "C" Corporation to run royalties through to fund a business ?

Thanks in advance for any input.

I believe there is a $5 million dollar exemption on estate tax now.

If you pass that to your chldren, your spouse can also pass down another $5 million tax free

The law was made more liberal last year, so that if your spouse only used a $1 million exemption, you can use $9 million

If you see you are going to be over this, you likely want to see an atty about setting up a trust & making gifts

In recent yrs Texas attys came up w/ some ways to evade taxes that I thought were questionable but they got away with it as there was little enforcement -- but that might be changing