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Jon Andrews
Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience:  I deal with all levels of tax planning and controversy - from the ordinary to the complex.
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self employment tax

Customer Question

I have a working interest in oil wells. Is the income I received from these wells subject to self employment tax? There is no material participation in the drilling or operation of the wells nor is it a limited partnership. It was merely an investment.
Submitted: 11 years ago.
Category: Tax
Expert:  R. Greg Paszkiewicz replied 11 years ago.
This is about all i can find so far (see below from IRS), it is definitely not a passive activity since you own the interest directly. Whether it is then taxable for SE or there is some exception for O & G income i don't know yet.


Exception for oil and gas.   If you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability, check the “Yes” box. The activity of owning the working interest is not a passive activity regardless of your participation.
R. Greg Paszkiewicz, Enrolled Agent
Category: Tax
Satisfied Customers: 357
Experience: 9 years preparing tax returns - Marietta, GA
R. Greg Paszkiewicz and 4 other Tax Specialists are ready to help you
Expert:  Jon Andrews replied 11 years ago.

Oil & gas  working interests are NOT passive activities and ARE subjectto self-employment tax if they generate net income. They do not fall under the "material participation" rules. This is a sort-of trade off for the advantages that you get for making the investment, i.e. immediate write-off of IDC, statutory depletion, etc.


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Jon Andrews, Certified Public Accountant (CPA)
Category: Tax
Satisfied Customers: 3118
Experience: I deal with all levels of tax planning and controversy - from the ordinary to the complex.
Jon Andrews and 4 other Tax Specialists are ready to help you
Customer: replied 11 years ago.
Reply to R. Greg Paszkiewicz's Post: I'm aware that oil & gas investments are not subject to passive activity rules and I can check the yes box. If I have to pay self employment tax on the income it kinda negates the depletion allowance does't it. At the very least would't the maximum tax be the medicare portion if the maximum Social Security was met from wage earnings?
Customer: replied 11 years ago.
Reply to Jon Andrews's Post: Would the Social Security Portion be offset by Social Security taxes paid on wages if the maximum was paid on those wages
Expert:  Jon Andrews replied 11 years ago.

Yes it would.


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