Through a Royalty Deed I inherited in 2025, I’ve now received one very small, but IRS reportable, sum of money that I need to include on my 1040 and I have a very basic question that I hope someone will answer. The 1099-MISC form that I received only showed 3 amounts, one for royalties, one for production/taxes, and one for total which was the amount I received. I do my own taxes using TurboTax and everything was input correctly, but TurboTax threw in a number for depletion. Since I don’t own the land and am only receiving mineral right royalties, is this depletion even appropriate?
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Yes, 15% of gross production revenue for % depletion is an allowed deduction.
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It used to be 27%, like many other extractive industries are still allowed, but only under certain circumstances. Most big producers have to use cost depletion, where the cost of drilling and completing a well is deducted over the life of the well.
Technically, small producers can take the greater of cost depletion or 15%. Inherited or devised properties get a step-up in basis to FMV on date of decedent’s death, so cost depletion could be higher than % depletion.
I’d forgotten about that, although I used it to great effect dealing with some inherited interests years ago.
The 15% depletion deduction is wonderful & don’t forget to claim your ad valorem (property tax) on producing minerals. Some tax preparers are ignorant of the depletion allowance. Turbotax will enter your royalty income on Schedule E (supplemental income) line 4, then automatically enter your 15% depletion on line 18. You can claim the 15% depletion every year as long as you receive royalties. Big royalty investors may choose a more complicated depletion method, which is impractical for small royalty owners.
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Thank you all for the quick replies! I almost deleted the entry just to get my taxes finished, but I’m so glad I asked first.
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Thank you, Roy, but this prompts another question: ad valorem tax would only apply to property that I owned, correct? I don’t own the land. I just inherited a fractional royalty interest and am struggling through the learning process now.
At some point you will receive an ad valorem tax bill from the tax assessor/collector for your mineral interest. You can deduct the property tax in the year paid, subject to some limitations. If it is a very small interest the county may not tax it as it is not worth the expense.
In Texas, royalty interests are real property subject to ad valorem taxes. Not sure about other states, but likely the same under old English common law, considered an interest in the land.
List GROSS royalties on Schedule E, subtract taxes (severance and ad valorem), production costs and depletion on appropriate lines.
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Schedule E, not A.
A is for personal itemized deductions, such as your home.
E is for deductions for rental/royalty properties.
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Thank you. TurboTax and I got that part done right. I was just surprised that the depletion allowance popped up, but I’m glad to know it’s applicable.
Not the same. Oklahoma counties do not charge property taxes on royalty interests.
Thanks for reducing my taxes sfchuck & dstallard. I claimed my minerals taxes & surface tax as an itemized deduction alongside taxes on my home, and IRS limited the amount of deductions. I did not in the past put my county minerals & surface ad valorem taxes on Schedule E as an offset expense to reduce my taxable royalties. I use TurboTax, so it’s easy to amend my past tax returns.
Excellent CSR30srlty, I smile every year when that 15% depletion allowance reduces my taxable royalties. You can continue applying the 15% depletion every year until Congress takes it away.
Congress repeatedly comes back to look at that 15% depletion. Stay alert on the issue. The National Association of Royalty Owners constantly monitors the situation to make sure that royalty owners are protected on that front.
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Also if you are an Oklahoma resident, your percentage depletion is 22%. It will show up as an adjustment on your Oklahoma return.
I’ve been using TurboTax for several years, and the depletion is calculated for me. I’ve never been audited or questioned by the IRS. I was glad to see the other comments that were similar to mine.