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.
Filing Income Tax on Oil and Gas Royalties
When you're filling out Form 1040, 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.” The royalty tax rate is simply your normal ordinary income tax rate.
Enter the amount listed in either Box 2 or Box 7 of your oil and gas royalties 1099 MISC in Line 4 on Schedule E. If it is not a working interest, the income should be listed in Box 2. If the royalty is a working interest the definition 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.
Self-Employed Oil and Gas Royalties
If you are an independent contractor or self-employed in a business related to a working interest in the oil or gas, you must report the royalty income on Schedule C instead of Schedule E and generally will be subject to self-employment tax. If your royalty is a working interest, the income should be listed in Box 7 of the 1099-MISC form.
- 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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