Depletion

[560hp]

I am preparing a 1041 for a Trust. the trust has oil and gas royalties. it distributes 100% of its income to beneficiaries. I note that the 15% depletion allowance is not shown as a deduction to get to taxable income in the 1041. In the beneficiary K-1's, the income without the depletion deduction is shown on line 5. However, in the K-1, the depletion amount is shown as a directly apportioned deduction on line 9. When the beneficiaries  file their Federal 1040's, will line 9 be deducted from line 5?

[AliciaP1 · Accepted solution]

Yes, the beneficiaries input the specific information from the K-1 Form 1041 and claim the income and deductions as they are shown on the K-1.  You should ensure you are including a statement identifying that boxes 5 & 9 are for the same activity with the K-1s you send out.

[560hp]

Thanks for the clarity. I do find it odd that while the depletion deduction is appropriately reflected on the K-1’s, the 1041 itself 

does not reflect it. Effectively, the Trust Fiduciary return shows a greater income than does the beneficiary K-1’s.

[AliciaP1 · Accepted solution]

It's because the Trust may need to report a reserve for depletion, but the excess, and the trusts that don't require a reserve, directly allocate the depletion amounts on the K-1.

Per the 1041 instructions for reporting Depletion:

For mineral or timber property held in trust, the depletion deduction is apportioned between the income beneficiaries and the trust based on the trust income from such property allocable to each, unless the governing instrument (or local law) requires or permits the trustee to maintain a reserve for depletion. If the trustee is required to maintain a reserve, the deduction is first allocated to the trust, up to the amount of the reserve. Any excess is allocated among the beneficiaries and the trust in the same manner as the trust's accounting income. See Regulations section 1.611-1(c)(4).