Solved: Royalty - depletion passive loss
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Level 2

Royalty - depletion passive loss

I have royalty income from two LLCs. The depletion computed one one is automatically transferred to the passive loss worksheets (Form 88582). The other does not. I've not been able to determine what happens behind the scenes to determine why the two are treated differently. I need some assistance.

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Anonymous
Not applicable

Royalty - depletion passive loss

on what lines of the k-1 does the royalty income and depletion appear.

 

from IRS PUB 925 Passive Activities

2. A working interest in an oil or gas well which you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and
you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary
Regulations section 1.469-1T(e)(4)(ii) 

An LLC would limit your liability.

Working interest is a term for a type of investment in oil and gas drilling operations in which the investor is directly liable for a portion of the ongoing costs associated with exploration, drilling, and production. As part of the investment, working interest owners also fully participate in the profits of any successful wells. This stands in contrast to royalty interests, in which an investor's cost is usually limited to the initial investment, also resulting in a lower potential for large profits.

 

there is another type of oil royalties where the investment is an overriding royalty interest. this is portfolio income not subject to PAL rules. 

 

the other possibility is that you have entered something incorrectly in TT for the LLC k-1's.   we can not see the k-1's or your tax return. 

for further support, you would probably would need to upgrade to live so a pro could review the return. 

 

View solution in original post

4 Replies
Level 15

Royalty - depletion passive loss

Just a wild guess here based on no facts what-so-ever. Maybe one is already fully depleted?

Anonymous
Not applicable

Royalty - depletion passive loss

on what lines of the k-1 does the royalty income and depletion appear.

 

from IRS PUB 925 Passive Activities

2. A working interest in an oil or gas well which you hold directly or through an entity that doesn’t limit your liability (such as a general partner interest in a partnership). It doesn’t matter whether you materially participated in the activity for the tax year. However, if your liability was limited for part of the year (for example, you converted your general partner interest to a limited partner interest during the year) and
you had a net loss from the well for the year, some of your income and deductions from the working interest may be treated as passive activity gross income and passive activity deductions. See Temporary
Regulations section 1.469-1T(e)(4)(ii) 

An LLC would limit your liability.

Working interest is a term for a type of investment in oil and gas drilling operations in which the investor is directly liable for a portion of the ongoing costs associated with exploration, drilling, and production. As part of the investment, working interest owners also fully participate in the profits of any successful wells. This stands in contrast to royalty interests, in which an investor's cost is usually limited to the initial investment, also resulting in a lower potential for large profits.

 

there is another type of oil royalties where the investment is an overriding royalty interest. this is portfolio income not subject to PAL rules. 

 

the other possibility is that you have entered something incorrectly in TT for the LLC k-1's.   we can not see the k-1's or your tax return. 

for further support, you would probably would need to upgrade to live so a pro could review the return. 

 

View solution in original post

Level 2

Royalty - depletion passive loss

Thanks for the quick reply. 

 

These are all ORR or Royalty Interests.  The revenue is listed on Line 7 - Royalties of the K-1.  Some years the preparer includes code T to Line 20 which is where the depletion is computed.  Some years it is not listed and the depletion is computed through the Q&A process in TT.  In the case of royalty income the depletion allowance is simply 15% of the royalty income and never becomes "fully depleted" unless it no longer produces income.  I know (or believe I do) RI and ORRI is considered passive income even if you were the GP of the LLC.  In my case I am not the GP of either LLC.  

 

One of the LLCs has historically not been shown in the PAL worksheets until 2018 - don't know why.  This year is the first where it had a loss.  The other LLC is new and had positive income and the depletion allowance was taken to the PAL worksheets.  I'll look at how that was entered.

 

I'm still curious to know what happens behind the scenes to tell TT to add amounts to the PAL worksheets.  If I knew that I might be able to better follow the information flow.

 

So, how do you upgrade to Live?

Level 2

Royalty - depletion passive loss

Thanks for your response.  See my response to another poster, but in this case depletion is computed at 15% of the royalty / overriding royalty income every year without limitation.  So, you can recover more than "invested".

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