Regarding royalty income, can we add what the company has taken from the gross income to our expenses?

[nelson1122]

The 1099-MISC has only 1 box filled in, that for royalties (2). Above the actual form they have typed in 2 figures, one labelled "Other Deductions" and another labelled "Production Taxes." Together these 2 amounts are about 30% of the royalties. Are we allowed to add those amounts to our expenses?

[MiriamF]

You are indeed allowed to deduct those expenses.

Not only do you get to deduct the production taxes and management fees, you also get to deduct a 15% depletion allowance, which TurboTax will calculate for you.

Oil and gas royalties go on Schedule E if you are a shareholder (not an owner). To enter the information in TurboTax (you will need the Self-Employed edition):

1. Select the Business tab from the top menu and click I'll choose what I work on.
2. under Let's gather your business info, select the second option, Rental Properties and Royalties. Click Update or Start.
   
3. Under Income from Rentals or Royalty Property You Own, select Yes.
4. If you are not a real estate professional, select None of the above, then Continue.
5. Under Is this a Rental Property or Royalty?, select Royalty and enter a property description (usually the company that sent you the form) and address.
6. Unless you are sharing the income reported on your 1099-MISC, under Does All the Income You Receive from [well] Belong to You, click Yes.
7. Under What Type of Royalty Income, select the first option, Oil and gas royalty income.
8. Under Enter Your Royalty Information, type in the payments reported and the production taxes. Do not check the box regarding whether income tax was withheld unless you see those taxes on your 1099-MISC.
   
9. The next screen automatically lists depletion. Then click More Expenses.
10. Because you probably did not pay anyone, click No, I did not pay for work that required a form 1099, then Continue.
    
11. Answer the question about whether your property was in any of the listed zones, then Continue.
12. Under Review Your [well] Royalty Summary, select Update beside Expenses.
13. Beside Management fees, list the number for Other Deductions on your 1099.

[560hp]

I have a similar question. In this case, the Royalty Income is in a Trust. I am using TurboTax business to prepare the Trust return and K-1’s for the beneficiaries.  I assume that I can deduct the owner deductions noted in the notes to the 1099 but cannot identify where to enter these deductions. The software shows a place to enter expenses such as legal, tax and insurance but does not offer a category for typical owner deductions. Where should I enter these owner deductions?

[JillS56]

The expenses would be entered under Other Deductions.  To get to the Other Deductions: 

1. Go to the Federal Return, Deductions tab.   
2. Go to  Expenses, tax, and fees
3. Scroll down to Other Deductions
4. Click on the Start button
5. Click Continue 
6. Answer the questions.

[560hp]

Thank you, that was very helpful. I have one additional related question that you may be able to help with. This particular property is held for Royalty purposes. But, in addition to Royalties, it receives Lease Bonus Income which gets classified in the 1099 as Rental. I am unclear how to denote the property, is it a Royalty Property or Rental Property. Turbo tax has no option for both. Perhaps I need to enter the 1099 twice, once for each?

[JillS56]

It depends.   Does the 1099-MISC have amounts in Box 1 and Box2?   If there is only an amount in Box 2 - Royalties, then it is only reported as Royalties.   If there is an amount in Box 1 - Rent, then it is only reported as Rent.   If there are amounts in both Box 1 and Box 2 then you enter both.  

Do Not enter the 1099-MISC twice.   When entering the 1099-MISC enter everything on the 1099-MISC on the same screen.