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Moving post to the Investors forum: Partners' K-1 (Form 1065) - Oil and Gas Basis reduction order? IDC and Depletion exceed adjusted basis

(moved and expanded from "get your taxes done")..

Hi! Hoping someone can help. I am a general partner in an Oil and Gas venture, receiving K-1s.

 I'm looking at the instructions for a 2023 Partners' K-1 (Form 1065) and the worksheet is different for 2023 than for previous years.

This year, I started out with an adjusted (outside) basis of 0$.

I increased it by $532 dollars (box 1 ordinary income). I have $410 dollars in Box 13 code J (IDC's) and $757 in box 20 code T (Depletion) which I treat as percentage depletion. I do not amortize the IDCs.

 

So, if in scenario 1), I report -$410 as IDCs loss first, the intermediate running basis is now $122. I then report the full -$757 as Percentage depletion second, reducing my basis to $0 (basis cannot go negative, the excess below zero is added back to basis to get back to 0). This gives me a total reduction of $1167 on Schedule E, and a new final adjusted outside basis of $0. I end up with a net loss of $532 - $1167 = -$635 on Schedule E, with a final outside basis of $0, and no carry-forwards.

 

For scenario 2, however, if I subtract the Depletion deduction first ($532 ordinary income -$757 depletion, reporting a net loss of -$225 loss on Schedule E, and then revising my intermediate basis back to 0), I end up with an intermediate $0 adjusted basis, and cannot report the IDC of $410 as a loss, since my running basis is $0, but rather must carry-forward to a future year. In this case my loss total against the $532 of ordinary income is -$757 for a net loss on Schedule E of -$225, and an end of year outside basis of $0, with $410 of carry-forward IDC losses to next year.

 

Which is the correct approach? I.e., what is the proper order to account for these deductions?

Thanks in advance..

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