Ten Tips

To Assure Royalty Owner Confidence

 

On a daily basis we assist royalty owners in their decision-making processes to ensure that they make smart choices about their oil and gas interests.

It's important to understand that not all of the money an owner receives from their oil and gas interests is theirs. Owners must set aside a portion of their royalty checks to pay Uncle Sam his due when tax day rolls around. Ignoring this can lead to expensive surprises on April 15.

By following the ten suggestions outlined below, a royalty owner can remain confident about personal finances, tax obligations, and oil and gas interests.

  • Keep every check stub.
    Keep those data-filled tear-off sections of the check in a safe, accessible place. Make sure that you know what you're getting, net and gross.
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  • Save part for the tax man.
    Don't neglect taxes. Save at least 25-30% of the royalty check in a specific account to pay your tax on this income.
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  • Remember part of the revenue is deductible.
    Watch for the deductions you can take from your gross income for transportation and marketing on the stub. Eventually all this will be deducted on IRS Schedule E.
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  • Make use of the depletion allowance.
    Bear in mind you can take 15% of the gross royalty income as a deduction for the life of the well. This deduction is essentially tax-free income.
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  • Understand that lease bonus income is taxable.
    Save a portion of your up-front lease bonus to pay the taxes that will be due. This bonus is FULLY taxable, with no depletion deduction allowed.
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  • Refrain from paying taxes on damage payments.
    Know that you won't be required to pay taxes on all of the damages to your land (such as for pipelines or drilling locations) as a part of the game. In fact, damage payments reduce the cost basis of your land, thereby saving you money in the long run.
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  • Avoid taking one check for a pipeline right-of-way.
    Request two checks: one for damages (tax free) and one for pipeline right-of-way (taxed). It's easier to keep track of this way.
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  • Acknowledge the 1099.
    Review your yearly 1099 carefully, and pay attention to the total amount of your royalty checks. The checks are net. The 1099 will have the gross amount. These will be reconciled on your Schedule E.
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  • Seek guidance.
    Be aware of your own limitations. Your accountant, a tax advisor, or a lawyer can make this much less painful for a lot less time and money than you would think. Consider a professional sidekick to make everything understandable and accurate at tax time.
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  • Ask for assistance.
    You're not the first one of our clients to be offered an oil and gas lease, and we may know some of the typical things others are negotiating for. If you need legal advice, we can refer you to a good lawyer, too.
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 Certified Public Accountant Allyson Baumeister is an officer and partner at Sanford, Baumeister, & Frazier, PLLC. Allyson works tirelessly for businesses of all sizes, maintaining a primary focus on business tax and consulting by providing clients with creative resolutions for technical business tax issues and clearly interpreting proposed and existing business tax law. She actively participates in the Council and PCPS Executive Committee of the American Institute of CPAs, Strategic Planning Committee of the Texas Society of CPAs, and Fort Worth Chamber of Commerce.