Capital Gains and Losses
Questions and comments about tax rules for buying and selling stocks, mutual funds, real estate and other assets.
K1 depletion, cost vs percentage
Posted by: AlvinS, March 14, 2009 10:07PM
I have a few oil and gas mlp's with K1's. Here's the reported depletion values for one of them.

$ 4774 - 20T1 Total Sustained - assumed allocation depletion
$ 2825 - 20T2 Cost Depletion
$ 140 - 20T3 Percentage depletion in excess of cost depletion
$ 1810 - 20T4 Percentage depletion in excess of basis

As I understand I need to take the larger of cost depletion or percentage depletion. The cost depletion value seems obvious (20T2) from the K1 supplemental but percentage depletion seems somewhat cryptic. Given the following K1 info on depletion, is the percentage depletion item 20T3 or is it 20T3+20T2 because it is stated "in excess of cost depletion" suggesting they should be added together, or is it 20T1?

If it's not 20T1 then what does that refer to?

I assume I can ignore 20T4 (excess of basis) as it is much larger than 20T3 (excess of cost).

So is the percentage depletion:
a) $4774 - 20T1
b) $2965 - 20T2+20T3
c) $ 140 - 20T3
d) ???? - 15% of gross income (shown by Turbotax and other literature)

Thanks for any light you can shed on this for me.
- Al

P.S. I'm under the 1000 equivalent barrels so that shouldn't be an issue.

Re: K1 depletion, cost vs percentage
Posted by: rbotterb, March 16, 2009 06:58PM
Take a look at the pubs on depletion on www.irs.gov. You'll find that unless you are a general partner (and most MLPs are going to give you a K1 as a limited partner), then you have to stick with the percentage depletion calculations. Now if your K1 is from a GP MLP, you may need to look at the K1 package to see if they address your issue since you might be allowed to do both - not having invested in GP MLPs (they have only popped up in the past couple years), I don't have any personal examples to work with on K-1 paperwork from such MLPs.

Roger

Re: K1 depletion, cost vs percentage
Posted by: AlvinS, March 16, 2009 07:37PM
Thanks for the reply. I'm not a GP but instructions with the K1 say I'm allowed to take percentage depletion (I have several different ones that say the same thing). What was unclear to me was which value is the percentage depletion.

I tried asking the question of www.taxpackagesupport.com for the mlp but they won't give any tax advice. All they would do is state that the answer to the question may be found in the following instructions:

>>The Partnership has computed your allocated share of statutory (percentage) depletion and cost depletion from the Partnership’s oil and gas activities. You are entitled to a deduction that is equal to the greater of percentage depletion or cost depletion (the greater amount is shown as “sustained depletion” in Line 20T1). However, the deduction for percentage depletion may be limited depending on your taxable income and other limiting factors.

Please consult your tax advisor regarding these limitations or refer to IRS Publication 535. Additionally, your ability to take a deduction in the current year may be restricted if you have a net passive activity loss from the Partnership for the year.<<

That certainly suggests I can use the 20T1 value even tho it is more than the cost depletion or the total of cost depletion plus excess percentage depletion.

FWIW: Here's what pub 535 says,
"You cannot claim percentage depletion for an oil or gas well unless at least one of the following applies.
* You are either an independent producer or a royalty owner.
* The well produces natural gas that is either sold under a fixed contract or produced from geopressured brine."

I can't find anything in pub 535 that distinguishes between general and limited partners.

Clear as mud. ;)
- Al

Re: K1 depletion, cost vs percentage
Posted by: rbotterb, March 16, 2009 09:41PM

In looking for the percentage depletion, for Oil and Gas the magic number is generally 15%, though if your K1 is into mining or timber the percentage can be different. Depending on the amount of this income is percentagewise versus your overall income, I believe there is some maximum of something like 65% of your income that comes into play too - though unless you are a Texas oil tycoon, I suspect you don't have to worry about that number on your tax return.

You did find the right pub (535). I generally like it when you have these MLPs to know where the IRS pub info is some you can make yourself an note for future reference (just in case Congress/IRS makes a few changes in the future).

Hope that clears up the mud a bit.

Roger



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