Tax Services for Oil and Gas Operators and Royalty Owners

Permian Basin operators, mineral rights holders, and royalty owners face a tax landscape that calls for specialized experience. Depletion allowances, working interest deductions, lease bonuses, and multi-state withholding all have their own rules. Blueprint Tax works with oil and gas clients in Midland and across the country year-round, so every available deduction is captured and no election is missed.

Royalty and Mineral Income

Royalty income looks simple on a 1099, but the owner statements behind it usually aren't. We:

• Reconcile 1099s against owner statements. Check stubs often show severance tax, deductions, and adjustments that never make it onto the 1099. We tie the two together so you're taxed on the right number.
• Claim depletion. Most royalty owners qualify for percentage depletion, which shelters part of each check from tax. We calculate it correctly, including the limits that apply, and check whether cost depletion gives you more in a given year.
• Deduct county property tax on your minerals. Texas counties assess ad valorem (property) tax on producing mineral interests, whether it's billed to you directly or taken out of your royalty checks. It's deductible against your royalty income on Schedule E, along with severance tax and the other costs netted out on your statements. Many owners never claim it.
• Report lease bonuses and delay rentals. These are taxed differently from royalties, and the timing of a large bonus can push you into a higher bracket. We plan for it before it arrives.
• Recover out-of-state withholding. Wells in New Mexico, Oklahoma, and other states often have tax withheld for nonresident owners. We file the nonresident returns that get that money back or credit it properly.

Working Interest Owners and Operators

Working interests are treated very differently from royalties. A working interest held directly isn't subject to the passive loss rules, so drilling costs can offset other income. We help working interest owners and small operators:

• Deduct intangible drilling costs in the year they're paid, or elect to spread them when that's worth more.
• Track lease operating expenses, equipment depreciation, and plugging obligations.
• Choose an entity structure that balances liability protection, self-employment tax, and the deductions you want to keep.

Inherited Minerals and Family Ownership

Many Permian royalty owners inherited their minerals. That raises its own questions, starting with basis. Inherited minerals generally receive a stepped-up basis: your starting point is the fair market value of the interest on the date the prior owner died, not what they originally paid. That number drives cost depletion, and it decides how much gain you'd recognize if you ever sell, so documenting it properly matters even when the minerals came to you decades ago. From there we handle how to report income from an estate or family partnership, and how to pass the minerals on to the next generation efficiently, including gifting strategies and filing Form 709 when gifts go over the annual exclusion.

Year-Round, Not Just in April

Oil and gas income swings with prices and production, so a fixed estimated payment rarely fits. We set your quarterly estimates around expected royalty and working interest income, so a strong year doesn't turn into an underpayment penalty, and a weak one doesn't tie up cash you didn't need to send.

Oil and Gas Tax FAQ

Do royalty owners have to pay self-employment tax?

Generally, no. Royalty income from minerals you own is reported on Schedule E and isn't subject to self-employment tax. Working interest income is different, and that difference is one reason entity structure matters for operators.

What is depletion, and do I qualify?

Depletion is a deduction for using up the oil or gas in the ground. Most individual royalty owners can take percentage depletion, a set percentage of gross income from the property, subject to limits. We compare it with cost depletion and use whichever gives you the larger deduction.

I have wells in New Mexico but live in Texas. Do I owe New Mexico tax?

Possibly. New Mexico taxes income from property located there, and operators often withhold for nonresident owners. Filing a New Mexico nonresident return is usually how you get back any withholding beyond what you actually owe.

Can you help with minerals I inherited?

Yes. We'll establish your stepped-up basis as of the date of death, report the income correctly, and plan for what happens to the minerals next.