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Lev, Tax Advisor
Category: Tax
Satisfied Customers: 29918
Experience:  Taxes, Immigration, Labor Relations
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My client payed royalty taxes and would like to expense them

Customer Question

My client payed royalty taxes and would like to expense them on her return. I don't know if she can do this or, if so, where. The problem I see arising is this: she paid the tax assessor-collector in more than one Texas county. I am not sure how to allot
these taxes because there were several royalty properties in each county, but she wrote one check per county, so I have no way to match the expense (royalty tax) to the income (individual property).
Submitted: 2 years ago.
Category: Tax
Expert:  Lev replied 2 years ago.

Can you verify

-- what do you mean under "royalty taxes" - is that real estate taxes which are based on the value of the property and collected by the county?

-- another issue - can you specify on which form your client reports income realized from these properties? and how that income is reported TO your client? 1099? or other form if any?

Customer: replied 2 years ago.
they are basically ad valorem taxes on real estate, collected by the various counties.I will be reporting the income on Sch E. The income is reported by the oil companies on Form 1099-Miscon Form 1099
Expert:  Lev replied 2 years ago.

If income is reported on schedule E - you would need to deduct these real estate taxes on the schedule E as well.

line 16.

However another question come up - is that royalty income from oil or gas extraction?
Taxpayers who receive these payments are royalty owners who do not have a working interest in extraction operations. Taxpayers should normally report these payments as income on Part I of Schedule E (Form 1040), Supplemental Income and Loss. Income reported on Schedule E is usually not subject to self-employment tax.

Taxpayers who do have a working interest in the extraction operations are subject to self-employment tax, and must file Schedule C (Form 1040), Profit or Loss from Business.

Customer: replied 2 years ago.
I am primarily concerned about the allotment issue. If she wrote one check each to several counties, and she had more than one company leasing from her and paying royalties in each of the counties, how is the tax she paid divided?
As an illustration: If she paid the Smith County tax assessor $1500, but Exxon, Chevron and Valero were all leasing from her, how do I know how to divide the tax between the three? Proportionately to the income she derived from each? I know that if she paid the tax she is entitled to take the expense, but I want it to be correctly allocated!
Expert:  Lev replied 2 years ago.

When income and corresponding expenses are reported for tax purposes - that is done per property - not per payer.
So - if Exxon, Chevron and Valero pay for the SAME property - these payments are ADDED and real estate taxes are deducted against that total income.

So - there is no need to allocate real estate taxes...
If however she paid the Smith County tax assessor for SEVERAL properties - she should have an assessment notice separately for each property and you do not need to allocate.
If for some reason - these assessment notices were misplaced - you always may contact the assessor office asking for a copy. In additional most counties have such information available online and that is considered public information.

Specifically - see here

If for some reason you still need to allocate and there is no other way - you may use any reasonable method - including allocation based on gross income.

However regardless how you allocate - that should not affect total tax liability - and because of that - it is very unlikely the IRS would ever question the allocation.