The IRS publication 535 states that: “In the case of leased property, the depletion deduction is divided between the lessor and the lessee.”
For leased and producing properties, I am assuming that the operators calculate a cost depletion or percentage depletion amount annually for income tax purposes.
Since IRS publication 535 states that the depletion amount is divided between the lessor and the lessee, can the operators provide this depletion amount to the royalty owners that can be used as a depletion expense deduction on individual federal income taxes?
Should I contact the operators and request a depletion amount on the properties for the royalties I received?
Your cost depletion is uniquely based on your basis and annual estimated reserves. Estimating the reserves is a tricky calculation and the oil companies are generally not willing to give you their data. You can easily calculate your percentage depletion which is 15% of your share of gross revenues. This is 15% of the gross sales on your monthly check stubs, added together for all wells. Think of this as the division between lessor and lessee. The percentage depletion is deducted against your basis in the minerals until that basis is reduced to zero. Your basis never goes below zero.
Turbotax prompts me to type in royalties, royalties appear on Schedule 1 “Additional Income & Adjustments to Income” line 5.
Turbo tax automatically inserts these same royalties on Schedule E “Supplemental Income and Loss” and automatically computes and deducts the depletion allowance near the bottom of Schedule E. Turbotax then inserts my net royalties after depletion on the first page of the tax return line 7a “other income”.
President Biden wants to eliminate the depletion deduction.
15% percentage depletion for oil, gas and liquids for federal tax return. Some states have higher rates for state tax returns. I think that Oklahoma as 22% for oil and gas. The state rates may also vary for resident and nonresident tax returns.