How much of your royalty income is a depletion deduction?

The Internal Revenue Code allows a deduction for a reasonable allowance for depletion on oil and gas wells (section 611(a)). When a property is leased, the deduction is apportioned between the lessor, who owns the royalty, and the lessee (section 611(b)(1)). There are two ways to figure it: percentage depletion and cost depletion.

For independent producers and royalty owners, section 613A(c) treats 15 percent as the percentage for oil and gas up to the depletable quantity. It is figured on the gross income from the property, which for a lessor is usually the royalties received, and it does not include lease bonuses or advanced royalties. It is limited by 100 percent of the taxable income from the property (section 613(a)) and by 65 percent of the taxpayer's taxable income for the year, with any excess carried to the next year (section 613A(d)(1)).

The adjusted basis of the property, times the units sold in the year, divided by the recoverable units at the start of the year. The basis is the one used to work out gain on a sale (section 612). Only you or your preparer can estimate the recoverable units. The calculator above takes those two numbers and does the arithmetic.

Your tax preparer decides, and needs both figures for each property. The 15 percent figure depends on limits that come from your whole return, and the cost figure needs a basis and a reserve estimate that we cannot know. This page works out both starting figures and does not pick one.

Not as gross income for percentage depletion on oil and gas. IRS Publication 535 says that for oil, gas or geothermal property gross income does not include lease bonuses, advanced royalties or other amounts payable without regard to production. Cost depletion on a bonus is the adjusted basis times the bonus over the bonus plus the royalties expected. If a lease ends before any production, the depletion deducted on the bonus is included in income.

Generally the fair market value of the property on the date of the decedent's death, or its value on the alternate valuation date if the estate elected that (section 1014(a)). It is not what the person who died paid. For community property in Texas, when one spouse dies, the whole community property interest generally takes the date-of-death value if at least half of it is included in the decedent's gross estate (section 1014(b)(6), IRS Publication 551).

The Estate report gives a date-of-death value range

IRS Publication 559 says the allowable depletion that accrues after a decedent's death is apportioned between the estate and the beneficiaries, depending on the income of the estate allocable to each, and that percentage depletion is allowable only to the person who receives the income. The Code says the same apportionment in section 611(b)(4).

What to do, in order, after a death

Royalties from oil and gas properties go on line 4 of Schedule E (Form 1040), with a separate column for each royalty property. The payer sends a Form 1099-MISC, box 2, when you received $10 or more in royalties. Those figures are from the 2025 instructions. Check the current year's before you file.

Match your checks to the 1099