Tax Treatment of Natural Gas Royalty and Bonus Lease Payments
Published on Friday, 05 August 2011 20:33 Written by Lawrence D. Brudy & Associates, Inc
Property owners deriving income from natural gas should be aware that the various forms of that income are subject to a variety of taxes, and that certain deductions and allowances are available.
Natural gas revenue from bonus and royalty payments is treated as ordinary income and is subject to federal income tax and Pennsylvania personal income tax. Bonus and royalty payments are not subject to self-employment taxes, and they are not considered capital gains.
Royalty payments fro9m a producing well on the property or by unitization with other properties are subject to a percentage depletion allowance. The deduction for the recovery of a landowner’s capital investment is a fixed percentage of the gross income (revenue) from the sale of the oil and gas.
For oil and gas royalty owners, percentage depletion is calculated using a rate of 15% of the gross income based upon the average daily production. Any other related lease expenses including attorney and CPA fees, land surveying, deed preparation or title work and property taxes are deductible in the year in which they occur.
Estate planning to minimize or eliminate inheritance taxes, perpetuate wealth from royalties and pass ownership of oil and gas interests to family members are areas our firms’ professionals regularly work on with clients.
Contact Thomas J. Kearn, CPA, at This e-mail address is being protected from spambots. You need JavaScript enabled to view it. or toll free at (855)935-1400 for more information