CPA in Houston – How are my oil and gas investments taxed?
Evans Sternau CPA is a CPA in Houston and provides tax planning and tax advisory services to help you navigate the the tax on oil and gas investments.
How are my oil and gas investments taxed?
Landowners and investors who own oil and gas interests are faced with unique and complex tax challenges. The tax planning opportunities available to landowners and investors are appealing. Working with a knowledgeable and experienced CPA in Houston will help you navigate the complexities and make sure your oil and gas tax returns are accurate.
Types of oil and gas investments
Outside of owning stock in an oil company, common types of oil and gas investments are working interests, royalty interests.
Working interest vs. Royalty Interest
A royalty interest is oil and gas ownership in which the landowner leases rights to another party to explore for minerals. In exchange, the landowner is entitled to a fixed percentage of the revenue generated from the minerals, this is royalty income. Royalty income is taxed as ordinary income. The sale of a royalty interest is generally treated as capital gain or loss (with depletion recapture). A qualified CPA in Houston can help you correctly report your oil and gas royalty income on your tax return.
A working interest ownership is the lessee and bears the expenses of production. A working interest owner is entitled to profit after royalty owners and expenses have been paid. Working interest income is taxed as ordinary income. The sale of a working interest is generally treated as capital gain or loss (with depletion and IDC recapture). A qualified CPA in Houston can help you correctly report your oil and gas working interest income on your tax return.
A deduction for depletion is allowed when determining taxable income from royalty and working interests. A depletion deduction is similar to depreciation deduction, in that the original cost of the investment is recovered over a period of time based. A difference between depletion and depreciation is that the allowable depletion deduction is based on the production of the natural resource, whereas depreciation deduction is based on a set period of time.
The two methods for computing depletion are the cost and percentage methods. The cost depletion method is a units of production method. To determine cost depletion, you must know the adjusted basis of the property, the total recoverable units of the property, and the number of units produced during the year. An alternative method of determining the depletion deduction is the percentage method. The percentage depletion method applies a fixed percentage to the gross income from the property. For oil and gas, the fixed percentage is typically 15%.
About The Author
Christopher Sternau, CFP®, CPA
Partner – Evans Sternau CPA LLC
Christopher Sternau is a Certified Public Accountant and Certified Financial Planner with over a decade of experience providing comprehensive tax and financial planning services to several of the wealthiest families in the United States. He focuses his practice on complex individual and closely held business tax planning and preparation. His clients have business interests in a wide range of industries including oil and gas, mining, real estate, cattle ranching, retail, technology and many others.
Chris is the founding member of Evans Sternau CPA LLC. Prior to founding Evans Sternau CPA LLC, Chris led the tax department for a family office in Houston, Texas. He also spent several years as a Tax Manager at Andersen.
About Evans Sternau CPA LLC
Evans Sternau CPA is seeking reform in an industry where responsiveness and availability are the exceptions – not the norm.
Our global network of committed CPAs and accountants places proactive thinking at the forefront of our work. With robust service offerings and client support strategies, we are always searching for opportunities to serve your best interests.
While our philosophy is rooted in tried and trusted methods, our execution surpasses the norm and redefines the standard.
Evans Sternau CPA provides proactive tax, accounting, and advisory services for business owners, entrepreneurs and individuals with complex tax challenges. Evans Sternau CPA is for those that want year round support, not just during tax season.