How to Report Oil & Gas Income on Tax Returns

If you receive income from oil and gas, the income is generally a royalty.

If you receive income from oil and gas, the income is generally a royalty.

Unless you are the owner of a large oil and gas corporation, your oil and gas income is generally from a royalty, which is a percentage of the total income that you receive when resources are extracted from your property or from a mineral right in which you own an interest. Some areas, such as the eastern half of Ohio, contain hydrocarbon deposits, which are oil and natural gas. When a property contains these natural resources, a contracted oil production company will drill and extract these resources. If you received royalty income, you should receive a Form 1099-MISC at the end of the tax year. The Internal Revenue Service treats royalty income as regular income, but requires you to complete Schedule E in addition to Form 1040.

Obtain Form 1040, Schedule E and the corresponding instructions from the IRS website.

Complete the top portion of Form 1040, providing your name, Social Security number, address, filing status and dependent information.

Enter your income information in the “Income” section, but stop once you reach the line labeled “Rental Real Estate, Royalties, Partnerships, S Corporations and Trusts.”

Enter the amount listed in either Box 2 or Box 7 of Form 1099-MISC in Line 3b on Schedule E. If your royalty is a working interest, the income should be listed in Box 7. If it is not a working interest, the income should be listed in Box 2. If the royalty is a working interest, you are responsible for paying a portion of the expenses incurred to extract resources from your land. If you are not responsible for any expenses, your royalty is not a working interest.

Enter any expenses in the “Expenses” section of Schedule E, if applicable. In this section, you can include insurance payments, mortgage interest, maintenance, utilities and taxes.

List your income and expenses in Part I of Schedule E. Because the income is from a royalty, you are not required to complete Parts II through V. Complete Part I to determine your income or loss from the royalty. Enter this amount in the line labeled “Rental Real Estate, Royalties, Partnerships, S Corporations and Trusts” on Form 1040.

Complete Form 1040, which is your personal income tax return, to determine the amount of your tax or refund. On this form, you must enter all of your personal income and information about your dependents, and calculate your deductions, credits and income tax. Sign and date the return.

Attach all supporting documents, including Schedule E, to your return and mail the forms to the address listed on the Form 1040 Instructions.

Tip

  • If you are an independent contractor or self-employed, you must report the royalty income on Schedule C instead of Schedule E.
 

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Angela M. Wheeland specializes in topics related to taxation, technology, gaming and criminal law. She has contributed to several websites and serves as the lead content editor for a construction-related website. Wheeland holds an Associate of Arts in accounting and criminal justice. She has owned and operated her own income tax-preparation business since 2006.

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