I'm seeing deductions from oil and gas royalty payments totaling approx 33% - 50% or more of the gross check amount on mineral rights in CO. On several lines of a monthly statement the processing cost was higher than the value resulting in a loss on those lines. Some are listed such as Ad Valorem tax, Severance tax and state withholding. The largest deductions are listed as "Processing" and "Other Deducts". Where does this money go and how do I know if the deductions are appropriate?
Are these deductions the reason my W-2 lists my gross as much higher that the amounts I received as payments.
Thanks!
Oil companies deduct as many expenses as possible against your royalties, unless prohibited by the terms of your lease or state law. In Texas, the royalty owner is assessed property taxes directlt and so that is not a charge, but this may differ in other states such as Colorado. The gross royalties listed on your W-2 should equal the total gross royalties on the check detail before the deduction of expenses. Your check is the net royalty = gross less expenses. The gross royalty is reported on Schedule E and then you deduct the expenses to arrive at your net taxable royalties. It is important to start with your gross royalty to calculate your 15% depletion.
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Charles, TennisDaze is correct.
The large deductions are happening to a lot of us. It seems like when prices dropped a few years ago, the "percentage" of expenses went way up. It could be a fixed cost on some of these items no matter how little the well produces or what the market price is, I do not know. The last couple of lease offers we have gotten, we have countered with a much lower royalty percentage with a "no cost lease" so we would not be charged expenses and neither time was that accepted.
How do we know if the deductions are appropriate?
Good question. I do not have the answer.
If you have a small royalty %, you are at their mercy. Only if you have a large royalty %, consider a royalty audit.