Accountants Community Home Page

Working Interest in oil wells

How do you enter expenses for an individual's working interest in an oil drilling operation on his individual return? There is no revenue (yet). 

 There are two locations. Each has "Lease Acreage Billing, Seismic Billing" and "Drilling Billing".

There are also payments that have been made for both tangible and intangible drilling costs (IDC). 


    Schedule E...where you will eventually enter the royalties and depletion allowance.


      I believe a Working Interest is Schedule C, and not subject to SE tax.  Phoebe will know and she is likely to weigh in, Archie/Chuck, too.

      • Susan, I agree.  A working interest in an oil well (even tho the 1099 often says 'royalties') goes on a Sch C.   I have the cite at work....well at the office, I'm obviously working, but I'm at home.
      •  If the 1099 says royalties, odds are you don't have a working interest.  An operator who screwed that up wouldn't be operating very long. However, a guy who pays IDCs?  He has a working interest. Seismic is probably G&G, which gets amortized over 24 months regardless of other well activity.  Drilling is probably IDC.  Tangible is 7-year depreciable property.  IDCs can be capitalized and amortized (dunno the life without looking it up) or expensed, but most people expense 'em.    He probably paid something to buy in, which is leasehold cost (subject to cost depletion). Use the O&G screens, and Lacerte will do most of the heavy lifting for you.
      •  Thanks for the reply. I can tell that you know what you are talking about. I understand about expensing, capitalizing and amortizing these items. I'm just not familiar with Oil & Gas reporting for tax purposes and, more importantly, how to do so in Lacerte. Screen 21 has two sub-sections, Set Information and Property Information. What does that mean? Is this where I should be for these items or do I just use Schedule C (Screen 16) and the depreciation entry screen (Screen 22)? Then do I just have those amortization items flow into Schedule C? If not, how do I use Oil & Gas (Sceen 21) to report? By the way, there is no 1099, just a spreadsheet. It lists the two locations being drilled as well as my client's percentage of interest in this venture. Thanks for your help, you are awesome.
      • Put nothing but the descriptive stuff at the top in Screen 16 (topmost section and General Information).  All your dollar amounts go in Screen 21. I use one Set per state, because it makes the reporting easier to tie out by state.  Give your set a descriptive name, tie it to the Sch C (both Form and Activity).  I let Lacerte allocate overhead (for net income limitation purposes) - that gets done in the Property screen.  Note that if you have multiple properties, using identical descriptions in the overhead descriptions doesn't result in the overhead being recombined on the Sch C.  Overhead is the only dollar item in Set. Properties are properties (for purposes of applying the net income limitation), although for royalties (where there's virtually never a net income limitation), I'll use it to keep track of payors.  Give your property a good description - I use the well / prospect name if I don't have anything better.  Link it back to the Set.  Give it a mandatory number (I use the automatically-assigned number you see on the left 3rd-down section, so the property that's #1 on the list gets numbered 1).  You don't have to enter a placed in service date, although it makes future dispositions easier.  Pick your production type - you only have to get close enough to get the desired percentage depletion rate, since it has no other significance.  Enter your income and expenses here, including expensed IDCs.  Link all the depreciation / amortization to the Property (except G&G, which goes straight to the Sch C).  If you've got reserves (or a rule of thumb you like), enter basis / reserves / depl rate into the cost depletion section (won't apply this year, as no production, but hopefully in the future).  Don't worry about any of the other stuff. Yes, you won't have a 1099 this year, since there's no gross income.
      •  Thank you so much. That was exactly the information I was looking for. As I said before, you are awesome. Thank you, Ron

       Phoebe do you agree that there is no SE tax on a Working interest in oil wells reported on Schedule C?

      •  I certainly don't agree to that.  Working interests are SE taxable.
      • Me neither.
      • I will go with Phoebe's and Archie's answer.  They sure know more about these than I do.
      Contribute an answer

      People come to Accountants Community for help and answers—we want to let them know that we're here to listen and share our knowledge. We do that with the style and format of our responses. Here are five guidelines:

      1. Keep it conversational. When answering questions, write like you speak. Imagine you're explaining something to a trusted friend, using simple, everyday language. Avoid jargon and technical terms when possible. When no other word will do, explain technical terms in plain English.
      2. Be clear and state the answer right up front. Ask yourself what specific information the person really needs and then provide it. Stick to the topic and avoid unnecessary details. Break information down into a numbered or bulleted list and highlight the most important details in bold.
      3. Be concise. Aim for no more than two short sentences in a paragraph, and try to keep paragraphs to two lines. A wall of text can look intimidating and many won't read it, so break it up. It's okay to link to other resources for more details, but avoid giving answers that contain little more than a link.
      4. Be a good listener. When people post very general questions, take a second to try to understand what they're really looking for. Then, provide a response that guides them to the best possible outcome.
      5. Be encouraging and positive. Look for ways to eliminate uncertainty by anticipating people's concerns. Make it apparent that we really like helping them achieve positive outcomes.

      Similar questions other people found helpful: