Royalty Income from Equities

[dp123lago]

I own some shares of BP Prudhoe Bay Royalty Trust and have a 1099-MISC from my brokerage firm reporting royalty income.  When I enter the 1099-MISC info into TurboTax, TT attempts to force me to associate that income with either (1) a property I own, or (2) royalty income from my business.  This royalty income is from NEITHER of those choices and is causing TurboTax to hiccup and not allowing me to continue progressing my return.

[millardlee2000 · Accepted solution]

Hate to tell you this, as this is a hassle, but turbotax is correct in treating BPT as a property in Schedule E.  So now the question is how to fill out the column for this property in Schedule E?  Google "BPT Tax Booklet 2022" to obtain instructions (and worksheets) on how to calculate the trust income, the administrative cost, and the depletion for each share (BPT calls them units) you own or held during 2022.     The admin cost and depletion are considered expenses in Schedule E so that is what makes it worthwhile to do these hand calculations.  They will reduce your income from a tax standpoint.

The first time you do this takes a long time to understand how to do it.   Save your worksheets and make notes so you can do it faster in future years.   Keep in mind that, whenever the units are sold, all of the depreciation will have to be recaptured.   You have have to keep records on when the units where bought, and when they were sold.  Depending when you purchased your units, the method for the calculations will differ (the tax booklet takes you through all this).

I don't buy royalty trusts anymore, since all this work at tax time is not worth it, I've decided.  Good luck!

[dp123lago]

Wow, thank you for this answer, and I opened the BPT tax booklet and read the information there.  I have a further question.  My tax summary statement from my broker shows income by quarter and expenses by quarter.  Can't I just use those numbers to calculate the admin expenses for Schedule E?  And TTax calculates a depletion allowance for me.  Can I use that instead of the schedules shown in the tax booklet?  And since the brokerage reports income and expenses by quarter, I should use the Part I instructions if I were to calculate the income, expenses and depletion for myself?

Also, you mentioned keeping track of depreciation for the time at which I sell the shares of BPT.  Did you mean depreciation or did you mean depletion?  I am not showing depreciation anywhere.

And again, thank you for the response.

[millardlee2000]

Glad to be of help for a very confusing topic.   My apologies, I meant depletion as you point out, not depreciation.

As far as your brokerage statements providing income and depletion numbers, I believe the technical answer is that your broker should not be providing you with numbers it knows nothing about.   How would they know what the numbers are?  Unless they have access to the tax booklet and their numbers align with those in the tax booklet.   I've read online that you are supposed to dispute these numbers from your broker as the BPT tax booklet is the fundamental source for income, expenses, and depletion.   Practically speaking, resolving differing numbers between your broker and the BPT tax booklet may not be easy to do and I don't have an answer for you.   AND here I need to tell you that I am no tax expert.

The technical answer is that one should follow the BPT tax booklet.  BPT is the trust and they are the originators of the numbers.  Now how to handle this situation on your return is between you and your tax accountant.

Again, good luck!!  I feel for you this royalty trust at tax time is no fun.  Not worth the trip in my opinion.