Treatment of depletion and lease bonus

Accounting and Taxes
1

Hello, just clarifying a couple things before tax season.

  1. We can deduct 15% of the gross royalties paid as depletion every year as long as wells are producing? Can all royalties be lumped together in one deduction on Schedule E or should they be separated by lease?

2. Bonuses are considered “rent”, not royalty on schedule E?

Thank you for any help on this.

2

I’m not one of the elders, what’s bonuses?

3

Royalties can be combined on Schedule E. Some filers separate by state for easier reporting on different state returns. Be sure to deduct severance tax and other cost deductions on the checks. You can also deduct other direct expenses such as property taxes on wells and legal fees such as for reviewing the oil and gas leases. Lease bonus is reported on rent line because it is not subject to depletion.

3 Likes
4

Note that you calculate the 15% on the gross. In addition to the deduction for depletion, you deduct severance taxes and what I call “other deductions” that the payors subtract. But of course you don’t subtract the withholdings for your own federal or state income taxes that the payors may have deducted from your checks. I attach a spreadsheet showing gross and subtractions payor by payor, and I segregate NM versus TX on that federal spreadsheet, so that my preparation of NM income tax return is a bit easier. And yes, the bonus amounts are treated as rent on Schedule E. By the way, don’t forget to also subtract your out-of-pocket expenses such as FedEx overnight, legal fees, the occasional look-up on CountyRecords.com, and so on.

1 Like
5

Appreciate the response - I would have forgotten about the mailing and record search fees, thank you!

6

Thank you for the response, Tennis!

7

Bonus for signing a new lease