I have inherited Unleased Mineral Rights in Howard County, TX. In 2025 I was contacted stating I had Royalty money in Suspense. I sent in a W9 and received the suspense money and ongoing monthly payments. My issue is how the Oil Company is reporting that money on a 1099. The Oil Company states it is NEC (nonemployee compensation). Every line on the Revenue Account statements indicates UMI (Unleased Mineral), but the company insists I own ‘Working Interest’. I have done no work for them. Do you have any recommendations for how to resolve this issue so that I can file an accurate tax return?
“Working Interest” is a very specific term that means you have a working interest in the drilling and operations of the well. Your ancestor probably had that designation if they helped pay for the wells. That type of interest designation passes with inheritance.
Contact your CPA for clarification to see if you can deduct any expenses. Have you gotten any bills from the operator?
The 1099-NEC is correct for an unleased mineral interest which is treated as WI for federal tax purposes. You only get 1099-M Royalty if you are paid royalties under an oil and gas lease. You will need to report on Schedule C as earned income. There can be advantages such as deduction of part of your medical insurance costs which are not available for Schedule E. As well as any JIB costs, etc. Discuss with your CPA.
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Thank you for your response. I haven’t received any bills from the operator; however, they reduce every payment for expense and tax which wasn’t listed on the NEC. If it is deductible, I don’t know where to list it. I didn’t know anything about the wells until July of last year when I was told I had Royalty money in suspense and now it turns out that it is not Royalty, but working interest on a purchase or arrangement made by an uncle in who died in 1959. The first suspense payment was issued to me in July of this year included 2020-2025, but for tax purposes I have to report the total as 2025. Can the Operator bill me? I don’t have resources to support drilling wells.
Thank for the response. What are JIB costs?
JIB is joint Interest billing. Your share of operating costs.
They should already be deducting your share of expenses from your check. Make sure to deduct these on your taxes. Also deduct the depletion allowance of 15% of your gross payment before expenses.
Before they drill any new wells, they will send you an AFE (Authorization for Expenditure) at which point you can elect to participate or not. The rules for how this is done are in an operating agreement that your uncle signed. This is really old production, most wells are depleted in 25-30 years.
Royalty interest bears no drilling, completion or operating costs – 1099-MISC on Schedule E. ULMI (unleased mineral interest) & WI (working interest) bear those costs – 1099-NEC on Schedule C. Yes, ULMI may not have directly paid costs, but oil company probably “JIB-netting,” i.e., retaining ULMI share of revenue to offset unbilled costs. MI owner or MI’s lessee bears the costs.