If I purchased a royalty for $10k this year. How can I deduct that $10k as an expense?

[Mar_Hou]

If I purchased a royalty for $10k this year. How can I deduct that $10k as an expense?

[DanielV01]

If I understand what is involved in purchasing a royalty, you do not get to deduct purchasing the royalty as a direct expense.  Rather, the purchase price of the royalty will be the basis which will determine how much gain you realize when you "cash in" the royalty.  You will be taxed on your net gain, subject to capital gains treatments.

In this case you purchased the royalty for $10,000.  No deduction now.  However, if later you sell the royalty for $15,000, you will pay tax on the capital gain of $5000.  Likewise, if you are unable to sell the royalty for 10,000, then you will claim capital loss on the difference.  (The amount of capital loss you can claim in a year is capped as well.  That's a topic for when you cash your royalty).

For additional information, please see this article:  How is a capital gain or loss calculated?

[Anonymous]

as a royalty owner you should be getting a report of the royalty's income and expenses, how and where you report depends on whether you bought a working interest (schedule C) or royalty interest (schedule E) 

Royalty payments

Royalty income is reported on Form 1099-MISC, Box 2, Royalties. The oil and gas company will generally also report related expenses, including production tax. The person will continue to receive these royalty payments while the well is still producing. This should be reported on Schedule E, page 1, as Royalties Received. Any operating expenses and depletion that is normally 15 percent of the income amount is also reported on Schedule E. This income is not subject to self-employment income.

The royalty and lease payments for those that hold royalty interest make them subject to the Net Investment Income surtax of 3.8 percent of the net amount. This would be reported on Form 8960, Line 4.

Working interest

The working interest would be reported on a Schedule C for the gross receipts, expenses and depletion. The taxpayer will receive the gross receipts (including lease and bonus payments) on Form 1099-MISC, Box 7, Nonemployee Compensation. This will be reported on Schedule C, along with the expenses directly related and indirectly related. These include overhead, dry hole, legal and administrative, taxes, and other operating expenses.

While working interest would not be subject to the Net Investment Income surtax, it would be subject to the self-employment tax (Social Security and Medicare) reported on Schedule SE.