I’m looking for a good C.P.A. in the San Angelo, TX area. I have browsed the forum and already read the the posts and responses/comments about this topic in general and understand that many mineral/royalty owners may not really need to go this route. However, I think I may still need to find a firm or an Individual with experience specifically in mineral/royalty related tax topics and strategies. In particular I am interested in whether I need to get/ it would be beneficial to get a new/updated Appraisal; which method of Depletion to use and when (can Depletion be taken against/used to offset some of the Bonus and if so is that a good idea) as well as other Tax issues and Strategies that while not necessarily only related to minerals but certainly relevant to offsetting Ordinary Income with Losses and/or more standard types of Depreciation. ( such as if I have a separate Business with a significant Loss during the same year as the Bonus was received can the Business loss offset some of the Ordinary Income from the Bonus and/ Royalty Income. Have a decent grasp on Passive vs Active Loss rules and Participation/at Risk requirements, but am hoping to get set up with someone or some firm that can handle all of these and similar issues. Am willing to travel if it makes a difference.
From your description, you have significant income and should already be using a CPA. Some general thoughts. What is your reason to get an appraisal? You cannot adjust your basis to the valuation. It is usually to give you an estimate of value to sell or for estate or gift purposes. For royalties, you use percentage depletion, unless you can get the reservoir engineering to determine the life of the wells to calculate cost depletion. You would need this analysis annually. The annual depletion (whether percentage or cost) reduces your basis in the minerals, down to but not below zero. After the basis is zero, you take percentage depletion each year. A bonus is not subject to depletion. Both bonus and royalties are considered to be portfolio income. If you have working interest income, that is treated as earned income, reported on Schedule C and subject to self-employment taxes.
Thanks for the Response and Information. It is family land with Legacy wells for the last 50 years. For the last 20 or so The production and Income from it has been fairly negligible so I hadn’t thought too much about it. However a new Lease was just signed on about half ofm the acreage. From out of State so thats where the current C.P.A. is, although I do spend a fair amount of time at this place in Texas.
Based on what you’ve said I need to go find the Original Appraisal? Guessing
the “Basis” would be zero now after 50+ years of Oil and Gas wells out here. So now I would still take 15% Depletion per year.
As far as I know it would be Royalty Interest’s involved, but I will confirm this as well.
For the Bonus, apparently somewhere between 40 and 45% goes straight to the IRS no matter what else your current personal Income/other Business Income, Investment Income situation is.
The basis will depend on whether the minerals have been owned by the same individuals or entity for the 50 years. Likely no need to find for 50-year old basis unless you are going to calculate the historicl depletion and think it will be less than the basis. If there were gifts during the 50 years, then the donee received the donor’s basis. If there were deaths and inheritance during the 50 years, then the each heir received a step-up in basis to the value at the time of the death and has to determine his depletion deductions over the years. However, if the heir received share or partnership interests, rather than the minerals directly, you would need to determine those special rules.