I am seeking opinion on whether income that is listed in Box 7, Nonemployee Compensation, on a 1099-Misc might be wrongly categorized in that box. This was brought to my attention by a CPA who is doing my taxes for the first time, but we live in the Midwest and he does not claim to be an expert on mineral related taxation issues. Here is an overview.
I receive income quarterly from a natural gas storage project in New Mexico by a Texas company. The income received is based on the amount of gas that is injected in and withdrawn out of the storage project. In the most basic terms as a formula it is as follows: a fixed dollar amount multiplied times the amount injected and withdrawn in proportion to my surface and mineral ownership in the storage project. The statements received with the payments calls them “storage injection/withdrawal fees.”
My accountant believes this is passive income, not non-employee compensation. I have been receiving this income for decades and have been doing my own taxes via Turbo Tax for 10 years and have never questioned the designation. As per my CPA’s suggestion, I have a call into the energy company to inquire but have not heard back. But I thought I would post here as well. Any opinions would be greatly appreciated. Thank you.
The energy company employee will not know the character of the revenues. Presumably you have a legal document - most likely a lease - which sets out the terms of the payments. It is a property right and is essentially a rental of the underground space for storage of the natural gas. So this income is properly reported on Schedule E as rental and not on Schedule C as earned income. It is up to you to contact the lessee and demand that a corrected 1099 be provided reporting the income as rent. This happens with ROW income which is also not earned income. Many companies are confused because they treat it as if the landowner is the same as an ROW agent. It is important to monitor 1099 forms and have corrections made.
TennisDaze is absolutely correct. I am a practicing CPA and I have spent most of February fighting with operators, pipe companies and others over incorrect 1099s. They don’t seem to have the sharpest tacks in the box but companies like XTO, OXY, etc, should know better.
The only possible reason that you might have anything in box 7 is if you have a working interest, or a joint venture with the company. I have had some SWD operators want me to partner with them in operations (which I never do), but she is right, absent an operating agreement, income should be put on box 1. BTW, these are “portfolio” items, not passive. They might be passive from your involvement, but they are portfolio and taxed differently. They are not subject to self employment as box 7 would be, but they are subject to Obama’s health care investment tax of 3.8%
Good luck with the energy company, but if they don’t change, include a statement with your tax return that you are not reporting it that way, because…