I am not a resident of New Mexico, but am planning on leasing my mineral interests in Lea County. I was wondering if anyone can point me to information about taxes at the state level related to a.) the lease b.) the royalties?
I know this has to be reported at the federal level but just curious about the state of New Mexico. And are these usually (both federal and state) deducted by the lessor, or is the lessee usually responsible for paying these taxes when filing? Thanks for any input!
You will have to file a New Mexico tax return and pay taxes on the income you made in New Mexico. You can then subtract that amount from the taxes you owe in your home state. It is best to have a good CPA do your taxes, so you don’t make any mistakes on this transaction. The lessor should issue a 1099 to you to notify the state and federal tax authorities, so they can write your payment off as an expense.
Thanks Luke!
I have 2 leased producing properties in NM. On the royalty statements they withhold NM State income tax. No Federal withholding unless you don’t provide the lease operator that is paying you royalties your SSN. For lease bonus money, I don’t believe there is any NM state income tax to pay (at least I have not paid any) and again if you give them your SSN there should not be any Federal income tax withholding. But of course bonus & royalty income is subject to Federal income tax. Don’t forget to deduct for expenses (what is shown on your royalty statements) and depletion on your Federal Income tax return.
HTH
N Case
My CPA tells me that I have to pay New Mexico state taxes on bonus income from leases in New Mexico. I live in California, so I can then deduct the New Mexico taxes, dollar for dollar, from my California state taxes. It may be different in N. Case’s state. However, I highly suspect that New Mexico would want to tax bonus income made in New Mexico.
You will need to file NM state income tax return and pay the NM “PIT” or Personal Income Tax on your lease bonus and royalty income derived from property in NM. Check the tax regulations of your own state to see if your state excludes the NM income from the income taxable by your own state; if the NM income is not taxed in your state, then the NM taxes paid will not be deductible in your state.
You can supply the federal Form W-9 to your payors to be exempt from federal withholding. You can supply NM Form RPD41353 to your payors to be exempt from NM PIT withholding. Regardless of whether federal and state income taxes are withheld from bonus or royalty income, it will be your responsibility to make sure that your withholdings plus estimated payments are sufficient to avoid federal or state penalties. Personally I prefer to make estimated payments, and to avoid withholdings.
Severance taxes will be deducted from your royalty income by the payor, and turned over to the State of NM. These are not the same as income tax withholdings.
When you prepare your tax returns, calculate the gross proceeds, before severance tax and income tax deductions, and take your 15% depletion allowance as a percentage of the gross, not as a percentage of the net. This will maximize the value of the depletion allowance and will thus shave a tad off your tax obligation. The Form 1099 should show both the gross royalty and the net royalty, but occasionally the 1099’s don’t, in which case I go back to my check stubs to determine the missing number.
Years ago I posted at length about my procedure for tax return prep. I’ll see if I can find my earlier post and reply with a link.
Copying/pasting in what I posted elsewhere in 2014:
Declare both royalty and bonus income on Schedule E of your federal income tax return.
For royalty income, be sure to drop in the gross royalty, then show the deduction of severance taxes and other deductions, if any, which were subtracted on your check stub. That way, you can take 15% depletion allowance on the gross, rather than the net. In other words, you want your 15% depletion allowance calculated on the larger number. Bonus income, on the other hand, is entered as rental income, and you don’t get to subtract the 15% depletion allowance.
Be sure to report the income shown on your Form 1099’s each year. It means that you calculate the royalty and bonus income for the year depending on the date of the check, not the date you received it. If you try to balance to your bank deposits each year, for example, you will need to adjust for checks dated in December and not received until January, and these timing differences can occur at both the beginning and the end of the tax year. If your royalty and bonus income don’t tie to the numbers on Forms 1099, you are more likely to get an inquiry or an audit from the IRS. Examine the Forms 1099 as they arrive, and if any are wrong, especially if income is higher than actual, call the company right away to ask for a corrective Form 1099.
You can subtract out-of-pocket expenses attributable to the Schedule E income. I subtract NARO dues, DrillingInfo.com fee, FedEx overnight mailing, copying at FedEx/Kinko, maps bought from Midland Map Company. Also I keep a detailed log of toll calls and deduct that expense. Once I bought an expensive huge locking ring binder which I would be using forever for my oil and gas reference notebook, so I deducted it as office supplies. I don’t try anything fancy such as home office deduction because I use my home office for other things. The Schedule E layout wants you to drop each out-of-pocket item in the column for a specific property. I have multiple tracts and if the expense is easy to attribute to a specific tract I drop it in that column; otherwise, I drop the expenses in against the tract producing the largest income. I generally enclose an exhibit showing exact details of the out-of-pocket expenses, indicating whether I have a receipt for each (i.e. I don’t enclose copies of the receipts but rather I indicate on my exhibit that I do have the receipt in my file), so as to reduce likelihood of inquiry or audit. I file federal and two states, by the way–my state of residence, as well as the state where the mineral interests are located. “Ugh” is right.
You probably already realize the IRS website easily allows you to open up Schedule E and take a look at it, or print it to paper.
There is continual pressure from some politicians in Congress (and the current occupant of the WH) to eliminate the 15% depletion allowance. You can join National Association of Royalty Members, and make additional contributions to their lobbying arm, if you want to do help.
So, I understand the NM PIT. But if your an LLC in Arizona, the LLC is a Partnership, do you have to pay NM income tax on bonuses? Does NM require the LLC to register as a foreign entity? And lastly, do you pay NM taxes on bonues, where the lease broker pays the bonus, they are located in Midland and you are located in Arizona? The property is in NM. Thank you in advance for your reply.