Oil and Gas Royalty Deductions Guide for Tax Season

There are only a few better feelings than getting your oil and gas royalty check in the mail. Whether you have decided to lease your mineral rights or you have aided in an operation’s production, the extraction and sale of oil or gas earn you a nice bit of money each month. Of course, all is fun and games until tax season. In this article, we will outline the most important things to know about oil and gas royalty deductions.

Depletion Allowances for Oil and Gas Royalties

Mineral rights are very valuable, that is until the resources have all been depleted. The IRS recognizes this and permits a depletion allowance on oil and gas royalty payments. Depletion allowances let property owners deduct the loss of value in the property’s subsurface, as well as any incurred expenses associated with owning the royalties.

Here, taxpayers can write off a portion of their income. Most commonly, people choose the standard 15% depletion deduction from the gross income. In other cases, heavily invested individuals can calculate the approximate remaining oil reserve. From there, they base their deduction on the amount of extraction that tax year.

Oil and Gas Royalty Deductions

Once your royalty checks start coming in, you may notice something. Usually, it is that there are some taxes that are out of your payment. Although the amounts vary between states, most U.S. states take out a severance tax on oil or gas production. This amount can be a deduction from your gross income. This includes any other business taxes or fees that have an association with the production.

Bonus Deductions

If you signed an oil and gas lease, then you may have received a nice upfront bonus payment. In the eyes of the IRS, this is considered ordinary income, in the rental property classification. There can be a deduction on your Schedule E on any bonus payment you receive. This includes any costs (like legal fees) in association with the lease negotiation.

If you have further questions about oil and gas royalty deductions, feel free to reach out to us here.