Intangible drilling costs

[Jelvmoore]

My 1099-Misc has amounts in BOX 2 (ROYALTIES) and BOX 3 (OTHER INCOME).  I input both amounts for that 1099-MISC. as prompted by the software.  When I create the “OTHER INCOME” amount into a SCH C for the oil and gas drilling business it does not remove it from the 1099-MISC entries, thus showing the amount twice.  Some TURBOTAX responses reply that an option is NOT to en enter the BOX 3 amount for that 1099-MISC if creating a SCH C for that entry.  How should I handle the BOX 3 issue?

[Jelvmoore]

Oil well drilling operation started in late 2020.  We received drilling expense invoices late 2020.  No production and no revenue was reported or distributed in 2020.  We did not receive income until 2021, thus no 1099-MISC in 2020.  I saw in a previous reply that deductions could not be taken until a 1099-MISC, 1099-NEC, K-1, or some other document was received from the drilling company.  Can the initial drilling expenses in 2020 be be taken along with the 2021 expenses?

[Carl]

Delete the 1099-Misc entirely. If 2021 is the first year you're filing SCH C, you'll also need to delete the SCH C.  Then re-enter the information from scratch. Now how you do that, depends on what version (online? Desktop?) and flavor (Permier? Self-Employed? Home & Business?) of TTX you are using.

[Jelvmoore]

I am using PREMIER (DISC VERSION) for personal and BUSINESS (DISC VERSION) for my two S-Corps.  This is our first year my wife has had “WORKING INTEREST” invoices and revenue from an oil property.  She now has working interest in 2 drilling companies on her mineral rights properties. One company sent the 1099-MISC with amounts in BOX 2 and BOX 3.  The other company sent a 1099-NEC, but we have not received any drilling cost data for that well.  Previous oil and gas revenues were just “ROYALTIES” amounts.  Obviously we know little about how to handle these new 1099 forms and data entry into TURBOTAX.  

[Jelvmoore]

One “working interest” well is in NEW MEXICO and we have been invoiced for our pro-rated amount of those taxes.  We also have a “working interest” well in Texas and the drilling company has paid those.   

[Carl]

I assume this issue is in the personal version for the 1040 return.

Under the Personal Income tab scroll down to the Business section and elect to start/update Business Income & Expenses and click the Edit button next to the business name.

Elect to update Business Income, then update 1099-MISC Income. ON that screen, you should be able to select the faulty 1099-MISC entry and delete it.

You may also need to check under the Personal Income tab in the Other Income section. Under that select Income from Form1099-MISC. If you see a 1099-MISC listed there, you can delete it. If you are prompted for 1099-MISC info, then go no further. Just click the Back button at the bottom left of the screen.

[Jelvmoore]

Thanks, I now have the oil and gas 1099 info reported on a SCH-C for my wife oil and gas.  Now working on the deduction section of that new business SCH-C.  I am in the “EXPENSES” section and can you recommend which section to report the “INTANGIBLE DRILLING COSTS”.   I currently have listed it under “OTHER EXPENSES” section.  I assume the “TANGIBLE” expenses would be put under the “DEPRECIATION” section.

[DaveF1006]

In the following IRS source, it mentions that Treas. Reg. section 1.612-4(a), stipulates that intangible Drilling Costs(IDC)  can be claimed as a deduction (expense) on the taxpayer's return for the first taxable year in which the taxpayer pays or incurs such costs. No formal statement is necessary.

If this is your first year, reporting this, you can report this as an expense in the manner you described above. If you choose to do this in your first year, you will need to report the IDC as an expense in all future tax returns when this activity is reported. 

If you choose to capitalize it though, you will need to report it as an asset, which is listed in the expense section when reporting your Schedule C income. This is if you are using the online version. If using Turbo Tax Home and Business software product, there is a Business Asset section where you will enter this information.

There are a couple of considerations to be made as you weigh your decision whether to expense or capitalize. 

1. Was a proper election to deduct IDC made?
2.  Are the costs in fact intangible and not depreciable asset costs such as in Tangible Drilling Costs. 

Be sure to read the IRS source link that I included above for further information.

@Jelvmoore

[gyaqwe]

Hello tax experts,

Have these business codes changed since 2020?  I'm trying to enter intangible drilling costs for tax-year 2022 on Schedule C. I have a working interest but no Schedule K1 (Subchapter K). Also for the 2022 tax year, no oil revenue received - only the initial buy-in (Expense), for the partnership. Significant portion of the buy-in is intangible drilling costs.

When I see the instructions for Schedule C, I'm only able to see Business Category = Mining and Code = 211120 for Crude Oil extraction at this link: (And not the 2123110 code referenced by @PatriciaV ).

https://www.irs.gov/instructions/i1040sc#en_US_2022_publink24329wd0e2697

Am I missing something?