Intangible drilling costs

[bertuleit]

I invested in an oil joint venture this year and with this I can deduct the intangible and tangible drilling costs associated with my investment.  Where in turbotax do I enter this information  I am unable to locate where this information is entered.   I did not receive a K1, due to it's a joint venture.

[JoannaB2]

It depends.  If you didn't receive a K-1, you may report the Intangible Drilling Costs on Schedule E, Page 2. You can deduct these expenditures in full or you can elect to amortize them.  Intangible drilling costs are defined as costs related to drilling and necessary for the preparation of wells for production, but that have no salvageable value. These include costs for wages, fuel, supplies, repairs, survey work, and ground clearing. They compose roughly 60 to 80 percent of total drilling costs.

Intangible drilling costs are 100% tax-deductible in the year incurred. It doesn't matter if the well produces or strikes oil; as long as it is operating by March 31 of the following year. the intangible costs are 100% deductible

[bertuleit]

So where is that entered in turbotax??   

[Irene2805]

Intangible drilling costs are usually reported on a K-1 and then flow to Schedule E,  p.2.  You can choose to deduct the full amount in the current year or amortize them.  

Enter the information as if you received a K-1 from a partnership -- the joint venture.  Report the intangible drilling costs in Box 13 (Other Deductions) with Code J.

1. Click on Federal Taxes > Wages & Income [In TT Self-Employed:  Personal > Personal Income > I'll choose what I work on]. 
2. Under Business Investment and Estate/Trust Income, click on the box next to Schedule K-1.  
3. On the Tell Us About Your Schedules K-1 screen.  Click on the Start/Update box next to partnership.     
4. If you have already entered K-1 information, you will see a Summary screen.  Click Add Another K-1 to enter your information  (or click on Edit to continue with the existing form entry).    
5. If you haven't started enter K-1 information, continue through the screens, entering the requested information.
6. On the screen, Check Boxes That Have an Amount be sure to mark  Box 13  and click Continue.

[bertuleit]

The issue is that I did not and will not receive a K1.   So, that's where my struggle is on where to enter this in TurboTax.

[Carl]

@bertuleit it seems you're getting different and conflicting answers from 3 different people, because all are making different assumptions on your "investment". You need to provide more details.

Do you own and operate a drilling company? if yes, are you a general partner or limited partner? Your reference to "joint venture" implies some level of ownership, but doesn't define that level or even confirm it. Or are you just an investor that has absolutely no say in the operations of the company? If the latter, you have nothing to report on any tax return until the tax year you receive some kind of tax reporting document from the endeavor.

A better understanding will help to determine if SCH C or SCH E is the correct way to report this, if it even has to be reported on your 2020 tax return at all.

[ToddL99]

Please clarify as @Carl states (above and below). We need to know a bit more about your involvement in this "investment" to determine if you need a Schedule C, are missing a 1099-MISC or Schedule K-1, or don't have anything to report this tax year (2020).

"Do you own and operate a drilling company? if yes, are you a general partner or limited partner? Your reference to "joint venture" implies some level of ownership, but doesn't define that level or even confirm it. Or are you just an investor that has absolutely no say in the operations of the company? If the latter, you have nothing to report on any tax return until the tax year you receive some kind of tax reporting document from the endeavor."

@bertuleit

[mariovv]

Thanks for the guidance about creating the "As If K-1"

However, since I did not receive one, TTax is asking for Partnership Employer ID.

How do I get around that?

[PatriciaV]

@mariovv

You cannot report this activity as if it is a partnership or corporation. In the absence of formal legal structure, you should report all income and expenses from this activity on Schedule C as an Oil/Gas business. Entering the information in this section of TurboTax will allow you to report accurately without the need for a tax id from an entity that does not exist.

from IRS Oil & Gas Handbook

1. An individual taxpayer who owns a working interest reports income from the sale of oil and gas on of Form 1040, Schedule C. This income is considered trade or business income.

[Jelvmoore]

I too have an oil drilling investment with INTANGIBLE expenses reported on my invoice expense reports.  I have also received a 1099-Misc showing ROYALTIES and OTHER INCOME amounts. Where can I deduct the INTANGIBLE costs for reporting year.

[Jelvmoore]

As referenced in my pervious comment about OTHER INCOME reported on drilling company’s 1099-MISC is called “WORKING INTEREST” and we have a “PARTNER NUMBER” assigned by the drilling company.  We invested $$ in the drilling costs but have no “VOICE” in the drilling company decisions.

[PatriciaV]

Your investment in a "working interest" in an oil or gas operation is reported on Schedule C (not Schedule E) and is subject to self-employment tax (Schedule SE). All your income and expenses (including IDC) will be entered under that business in TurboTax.

Note: A working interest held directly, or through an entity that did not limit liability, is not a passive activity even if you did not materially participate.  A working interest is one in which the owner pays all (or his pro-rata portion) of the development and operating expenses to extract oil or gas from the ground.

For this reason, do not check the "I did not actively participate..." box. The activity of owning a working interest is not a passive activity, regardless of your participation. 

The business code for drilling operations is 2123110. You may need this information when setting up your Schedule C business.

Intangible Drilling Costs may be fully deducted as a business expense by electing to do so, or capitalized and recovered through depreciation or depletion. An AMT adjustment is required if costs are not amortized over 60 months.

Due to the complexity of tax law regarding a working interest, you may benefit from the assistance of a local tax professional with expertise in this area.

[Jelvmoore]

Thank you. So you are, in effect, saying I need TURBOTAX SE to create a small business for my oil well investment instead of using TURBOTAX PREMIER.  Will “UPGRADE” selection transfer the existing data from PREMIER to SE?  I have noticed an “UPGRADE” selection while working in PREMIER.  Is UPGRADE the best choice for my situation or just buy SE and start over. (NOTE: I am using “BUSINESS” version for my two non-oil related S-Corporations)

[Jelvmoore]

It is also my understanding that “BUSINESS” version,  which I currently use for my S-Corps, will not do SMALL BUSINESS schedule C.

[Carl]

Correct. SCH C is included with the personal versions of TurobTax. If using the online version, you'll need Self-Employed. If using the CD version, all of them include SCH C.

SCH C is for a sole proprietorship or single member LLC.