Schedule E: Deductions, Taxes, and Percentage Depletion on Natural Gas Royalty

Hello,

Quick question on filling out the Schedule E.

I received a 1099-MISC that includes the following information:

  • Gross revenue (reported to IRS)
  • Deductions from revenue (not reported to the IRS)
    • Production taxes
    • “Other” revenue deductions
    • Federal or state withholding amounts (they are both zero)

I am considering accounting for the expenses from revenue on my schedule E in the following manner:

  • Line 16: Taxes: Production taxes (from list above)
  • Line 18: Depletion: 15% of gross revenue (percentage depletion)
  • Line 19: Other: “Other” revenue deductions (from list above)

Is this approach correct?

Or am I unable to list the deductions above (i.e, “Production taxes” and “Other revenue deductions”) from Schedule E, given that I am already allowed to take a 15% depletion expense?

Thank you for your time!

In my non-tax expert opinion as long as the amount you are reporting is gross royalty income you should be able to deduct your share of production expenses and also your percentage depletion deduction.

I’d like to hear a tax professional’s opinion on this, but with higher standard deduction levels making itemized deduction of property taxes less likely, on Sch. E you can also consider deducting any County or School taxes you paid on that property, or mineral interest, against any remaining royalty income you are reporting from that property.

Thank you for your response, Dusty.

It would be nice to hear a tax professional’s opinion on this.

I’d also like to understand if we can take anything higher than a 15% depletion deduction.

For example, I own a small percentage of mineral rights to a property in northwest Louisiana that’s producing natural gas. Publication 535 indicates that if your average daily production exceeds your depletable gas quantity, then you can provide a separate calculation of depletion percentage.

Gross Royalties should be reported on Line 4 of Schedule E. Depletion expense of 15% will be calculated on the gross royalty amount. All deductions withheld by the Producer such as production taxes, severance taxes, marketing deductions, other deductions, etc. are deductible on the Schedule E. I attach a gas well schedule with my clients returns (provided by the tax software I use) that shows these deductions and they end up as a total Line 19, Schedule E, Other Expenses. I also deduct my clients associated mineral real estate taxes, any professional fees (such as my fee to prepare the return), and NARO dues and conference expenses.
All of my clients use the percentage depletion (15%) method. None currently benefit from the cost method (you would need basis in the minerals to use this method). Gross royalty - producer deductions - 15% depletion - mineral owner eligible expenses = net taxable income on Schedule E. Jeffrey Yourkovich CPA

2 Likes

Jeffrey, Thank you for your response! You just helped me realize that I can get a nice tax break on something that I have been missing out on for years. Much appreciated!

For the Oklahoma return you get a 22% depreciation, but you have to back out the Federal amount. I think this nets a 7% addl for the Oklahoma return. Special form if you are not a resident of OK.

1 Like