Gathering Fees

[JJStephens]

Client is a trust that receives mineral extraction royalties. One of the 1099s indicated a gross royalty payment of $25,521 but client reported to me they received only $18,802. I had them call the 1099 issuer and was told the $6719 difference was for tax deductible gathering fees.

I've never heard of gathering fees so I googled them. I think they are fees assessed by the royalty payer for extracting/transporting the product. All I found was a vague reference that they're deductible on Schedule E. My guess is they would be treated as an 'other expense'.

Anyone have any idea if I'm on the right track?

[taxxcpa]

You can deduct gathering and compression fees.  Severance tax should be calculated on the net after these deductions charged to royalty owners,

Report gross royalty on Schedule E then deduct gathering fees and 15% royalty

[JJStephens]

Thanks for the info ... but I'm even more confused. I guess I'm going to have to read up on the severance tax. (Can you tell I don't get this very much?!?).

[taxxcpa]

I meant 15% depletion--not 15% royalty

[Catherine]

19 hours ago, JJStephens said:

Thanks for the info ... but I'm even more confused. I guess I'm going to have to read up on the severance tax. (Can you tell I don't get this very much?!?).

If memory serves, severance tax is levied because the materials are "severed" from their place of origin and used elsewhere.  Sort of like the obverse of Use Tax.

[taxxcpa]

Severance tax is called production tax in Texas. In Texas It is 7% of the "wellhead"value of gas ( or 4.6% of the wellhead value of oil.)  Since gas must be compressed and gathered (to a delivery point to the pipeline) that is deductible in calculating tax on sales price minus these costs.

In some states gas is taxed by the MCF rather than wellhead value. 

I don't think you really need to know any more about severance tax than how much they paid.  On schedule E show the gross amount received then deduct depletion (15% of gross amount) and deduct any gathering and compression fees charged.