Just recieived a check for three years leasing. I inherited the rights from my Fathers land that goes back decades. Whats with the taxes ? Report as ordinary income, report as long term gains, or is this inherited property that only now become income.
I'm sure you are going to get all kinds of advice on this one; but, after all that expert advice, I believe you will find that Lois Lerner and Obama are going to get as much as possible and that will be: ORDINARY INCOME!
Good luck.
"three years leasing" does that mean you were paid a lump sum bonus for leasing it for a 3 year term? That is Rental Income. Alternatively you have been paid accumulated Royalty Income.
You should receive a 1099 Misc issued by the Oil Co. that paid you and it which will say for sure. Assuming it was paid by an Oil Co and not your Father's estate atty.
Basic Turbotax will show you how to report it on Schedule E. If it is Royalty Income the 1099 will show Gross Income and somewhere a list of deductible taxes/expenses. The amount you actually received should equal the reported Gross less these expenses. You can also deduct Depletion Allowance which is 15% of the Gross. Rental Income is reported similarly.
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Yes I got a 1099 from the oil Company and sent it back filled out. Yes a lump sum for the three years. So the amount is considered rental income and taxed as ordinary income less 15% of the gross amount the oil depletion allowance..Thanks
That's the way my accountant understands it and that's the way I paid on my lease bonus in 2010 and am getting ready to do another one. I sure would like to be able to claim it is long term capital gains; but, I don't believe the IRS would like that. If Obama and his crowd get away with it, I fear that we will loose the 15% depletion allowance in the future as well.
Good Luck!
As I understand this, lease bonus is considered taxable income. Selling of rights that you have held for more than a year is long term capital gains. There are tax deferred transactions involving mineral rights and working interests as "like kind property" on tax code 1031. Royalty income is considered taxable income. I am not a tax expert only a mineral owner.
Congratulations on getting a bonus check. A lease bonus is taxed as ordinary income.
How about the 15% depletion allowance Bigfoot refered to. Dont want Obama to get any more than I can help.
Hello guys:
I stand corrected on depletion allowance. Checked with my accountant. The 15% depletion allowance only applies to royalties. Bonus money is ordinary income and no depletion allowance. Sorry for the confusion, guess I was just hoping.
I respectfully disagree with your accountant. If you wish to research this subject it has been thoroughly discussed on TurboTax's Q&A blog. You may also read Oklahoma Income Tax instructions....they absolutely allow depletion on bonus income.
This brings up a question I am hoping to get answered by my accountant but someone here may already have experience with it.
I asked the landman if the signing bonus could be issued as a check made FBO so that I can directly deposit it into a ROTH IRA without it going through my personal bank account and do the same with any royalty payments. He said the check could be issued that way.
I understand tax will have to be paid on the amount as income as it goes in but the gained interest is non-taxed. No one mentions this here so I'm wondering if this is commonly done? Or is there a better way?
Sam:
When I initially posted that the 15% depletion allowance was allowed for signing bonuses, I was sure that is how my taxes were filed a few years ago; but, when I checked with him, he said that wasn't the case. If you are correct, it sure would be nice to hear.
Thanks for the input. Sounds like I need to do some serious homework!
Sam Wilhite said:
I respectfully disagree with your accountant. If you wish to research this subject it has been thoroughly discussed on TurboTax's Q&A blog. You may also read Oklahoma Income Tax instructions....they absolutely allow depletion on bonus income.
Here is an excerpt from the IRS Oil & Gas Handbook. See No. 3. It states that percentage depletion is not allowed on oil and gas bonuses. I leased my minerals a few years ago and my accountant did not take any deductions for depletion. I wish it were an allowed expense.
4.41.1.3.9.4 (10-01-2005)
Lease Bonus
Bonus is the term applied to the considerations received by the lessor upon the granting or execution of an oil and gas lease or sublease. It may be paid in a lump sum or in installments.
To the payor (lessee), the bonus payment is a capital investment made for the acquisition of an economic interest in the minerals (working interest). A production payment retained by the lessor is treated as a bonus payable in installments. See Treas. Reg. 1.636–2(a). The lessee's investment in the working interest is recoverable through deductions for depletion (if the lease becomes productive), abandonment loss (if the working interest becomes worthless or expires), or as cost of sale (if the working interest is sold).
To the payee (lessor), the bonus payment is ordinary income subject to cost depletion. See Treas. Reg. 1.612–3(a). Percentage depletion is not allowed on lease bonus payments. See IRC 613A(d)(5).
As explained in IRM 4.41.1.3.9.2, the cost depletion formula in Treas. Reg. 1.612–3(a) does not produce a realistic result with respect to a nonproven property. However, in Collums v United States, 480F. Supp. 864, 5, the Court allowed a sublessor to use the computation to deduct 100 percent of basis in a nonproven property as cost depletion. No action or decision has been issued with respect to this case. The case should not be followed unless it becomes apparent that the result in Collums will be accepted by the Service. Such is not the case at this time. See PLR 8532011.
Thanks for the excellent follow up on this topic. May not be what we would like to hear; but, well documented documentation upfront, is much better than worrying about an IRS audit later on down the road.
Thanks again for the homework!
6th Generation Texan said:
Here is an excerpt from the IRS Oil & Gas Handbook. See No. 3. It states that percentage depletion is not allowed on oil and gas bonuses. I leased my minerals a few years ago and my accountant did not take any deductions for depletion. I wish it were an allowed expense.
4.41.1.3.9.4 (10-01-2005)
Lease Bonus
Bonus is the term applied to the considerations received by the lessor upon the granting or execution of an oil and gas lease or sublease. It may be paid in a lump sum or in installments.
To the payor (lessee), the bonus payment is a capital investment made for the acquisition of an economic interest in the minerals (working interest). A production payment retained by the lessor is treated as a bonus payable in installments. See Treas. Reg. 1.636–2(a). The lessee's investment in the working interest is recoverable through deductions for depletion (if the lease becomes productive), abandonment loss (if the working interest becomes worthless or expires), or as cost of sale (if the working interest is sold).
To the payee (lessor), the bonus payment is ordinary income subject to cost depletion. See Treas. Reg. 1.612–3(a). Percentage depletion is not allowed on lease bonus payments. See IRC 613A(d)(5).
As explained in IRM 4.41.1.3.9.2, the cost depletion formula in Treas. Reg. 1.612–3(a) does not produce a realistic result with respect to a nonproven property. However, in Collums v United States, 480F. Supp. 864, 5, the Court allowed a sublessor to use the computation to deduct 100 percent of basis in a nonproven property as cost depletion. No action or decision has been issued with respect to this case. The case should not be followed unless it becomes apparent that the result in Collums will be accepted by the Service. Such is not the case at this time. See PLR 8532011.
A later edition of the IRS Handbook clarifies the answer a bit. Prior to 1986 when Congress changed the tax law, Bonus income WAS subject to percentage depletion allowance (it is still subject to Cost Depletion) because it considered to be advance royalty income (not rent). For Oklahoma State Income Tax, percentage depletion is still allowed (20%). So, I stand corrected as to the current Federal rule.
While Cost Depletion is NOT related to the Bonus Tax question you first raised, you might want to consider it. If you received your mineral rights by inheriting them, then a valuation of the rights was normally established as part of the Federal Estate Tax (and possible State probate) process. Normally an appraisal of the estate is performed. That appraised value can be used to calculate Cost Depletion allowance. I believe a typical calculation would deduct 1/5 the cost basis over 5 tax years. ie: If your 10 acres were valued at $500 per ac when your relative passed away then your basis is $5000. Assuming a 5 year term you would deduct $1000 per year for 5 years.
You need to check with a professional or understand the regulations before you follow any of this, of course.
From the 2013 Handbook:
4.41.1.2.1.2 (12-03-2013)
Landowner and Fee Royalty Owner
Cash bonuses received upon the execution of an oil and gas lease are regarded, for income tax purposes, as advance royalties. The Supreme Court in Anderson v. Helvering, 310 US 404, 409 (1940); 24 AFTR 967; 40-1 USTC 553 stated "cash bonus payments, when included in a royalty lease, are regarded as advance royalties, and are given the same tax consequences." Bonus payments are not subject to percentage depletion after August 16, 1986 because of the enactment of IRC 613A(d)(5).
Dont understand this. Is it saying that after August 16th 1986 bonus payments do not qualify for the 15% depletion or that they are ?
Prior to 1986 they were entitled to Federal depletion allowance; not after. State tax still permits the deduction.
So now deduction on Federal taxes.
I agree with you Bigfoot. Please note I stated that the cost depletion issue does NOT apply to bonus income, however, it may be an overlooked deduction for someone who has inherited minerals.
" Overlooked deduction for someone who has inherited minerals" ????? The mineral rights on the land were inherited several decades ago.