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Schedule K-1 (Form 1065) - Oil and Gas Depletion Information

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**The information below has not been verified for the 2020 tax year as IRS Pub. 535 has not yet been released by the IRS.**

If you received a Schedule K-1 (Form 1065) Partner’s Share of Income, Deductions, Credits, etc. with an amount reported in Box 20 with a code "T" for depletion and you do not have royalty income or deductions to report on Schedule E (Form 1040) Supplemental Income and Loss on page 1, please follow the steps below to enter this information on to your return.

Use the information provided by the partnership to compute your depletion deduction.

Depletion: Cost Method Vs. Percentage Method

There are two ways of figuring depletion on mineral property; cost depletion and percentage depletion. Generally, you must use the method that gives you the larger deduction. However, unless you are an independent producer or royalty owner, you generally cannot use percentage depletion for oil and gas wells. See Oil and Gas Wells, later.

Cost Depletion:

To figure cost depletion, you must first determine the following:

  • The property's basis for depletion
  • The total recoverable units of mineral in the property's natural deposit
  • The number of units of mineral sold during the tax year

With those items determined, you can compute cost depletion:

  1. Divide your property's basis for depletion by total recoverable units. Answer is rate per unit.
  2. Multiply the rate per unit by units sold during the tax year. Answer is cost depletion deduction.

Percentage Depletion

To figure percentage depletion, you multiply a certain percentage, specified for each mineral, by your gross income for the property during the tax year. When figuring gross income do not include any rents or royalties you paid or incurred for the property. The percentage depletion deduction generally cannot be more than 50% of your taxable income from the property figured without the depletion deduction and the domestic production activities deduction.

A small producer's exemption is available for small oil and gas producers and royalty owners. Small producers use percentage depletion at a rate of 15%.

Please refer to IRS Publication 535 Business Expenses, starting on Page 35 for additional information about Depletion.

Once you have determined the depletion deduction, add a separate Schedule K-1 to your return. Enter "Depletion Deduction" in the Partnership Name field and use the same EIN as reported on the Schedule K-1 you received. Enter the depletion deduction in Box 1 as an ordinary loss (enter in Box 1 as a negative number). If you need to report the deduction as nonpassive, you must select that you were a Material Participant.

Per IRS Instructions for Schedule E Supplemental Income and Loss, on page 10:

Line 28

For nonpassive income or loss and passive income or losses for which you are not filing Form 8582, enter in the applicable column of line 28 your current year ordinary income or loss (after applying any special rules that limit losses) from the partnership or S corporation. Report each related item required to be reported on Schedule E (including items of income or loss stated separately on Schedule K-1) in the applicable column of a separate line following the line on which you reported the current year ordinary income or loss. Also, enter a description of the related item (for example, depletion) in column (a) of the same line.

If you are required to file Form 8582, see the Instructions for Form 8582 before completing Schedule E.

To enter depletion deduction information:

  1. From within your TaxAct return (Online or Desktop), click Federal. On smaller devices, click in the upper left-hand corner, then click Federal.
  2. Click Business Income in the Federal Quick Q&A Topics menu to expand, then click Partnership income (Form 1065 Schedule K-1).
  3. Click + Add Partnership Schedule K-1 to create a new copy of the form or click Edit to review a form already created.
  4. Continue with the interview process to enter all of the appropriate information.
  5. On the screen titled Partnership - Business Name, enter "Depletion Deduction" as the Partnership name, enter its Partnership ID number, then click Continue.
  6. On the screen titled Partnership - Schedule K-1 Information, check Box 1 - Ordinary business income (loss), then click Continue.
  7. On the screen titled Partnership - Ordinary Income, enter the 1 - Ordinary income or loss amount as a negative, then click Continue.
  8. On the screen titled Partnership - Material Participant, select Material participant to report the deduction as non-passive, then click Continue.

Note. If you have royalty income to report, you would not use the steps above to enter your depletion deduction. Instead, you would enter the royalty income in Box 7 of the Schedule K-1, and the depletion deduction in Box 20 (code "T"). Each of these entries can be found within the Schedule K-1 (Form 1065) Q&A screens. You would still use the calculation methods mentioned above to manually determine your depletion deduction.

Note that any link in the information above is updated each year automatically and will take you to the most recent version of the document at the time it is accessed.

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