Switched Keys

Training for royalty transactions in VITA are brief and instructions for how to enter them in Taxwise are not easy to find. With some investigative trial and error, I believe I understand how to best enter them in Taxwise. It is rather straightforward and logical, but other logical attempts to enter royalties have not helped to get back on the right track.

Schedule E

Entering royalties is probably best done by setting aside the 1099-MISC for the royalty, completing the Tax return interview, and then adding a Schedule E. That is where you first enter the location of the royalty property in A, B, or C. Although you may not have an address, some description is required here to link to. After identifying the property, just for fun, you can try to enter the amount in the appropriate column for royalties for that property. That doesn't work, or at least it doesn't for me.  The link there should point you in the right direction. Select the link button and add a 1099-MISC worksheet.

1099-MISC worksheet

When you add a 1099-MISC worksheet directly from the forms, you have to link it to a form and it provides options. In this case, link to Schedule E. When you go to the worksheet, you will need to select the property at the top of the form before you begin entering information. This is the entry you made in A, B, or C for the location. The most important number to enter on the worksheet is the amount of royalties, but don't forget to enter all of the numbers from the 1099-MISC. Most oil and gas statements I have seen have a production tax listed. This amount is entered in the Taxes column.

One thing that is not listed on the 1099-MISC is the depreciation expense. In cases where the taxpayers have a lot of royalties, they should have maintained a list of values for cost, expected production, and prior cost depreciation. The typical VITA taxpayer may not have anything but the 1099-MISC. In that case, the only thing you can do is use percentage depreciation (if allowed) based on the type of mineral.

State Return

Another possible twist to royalty payments is that it could be in another state and state income tax was withheld. In order to process that, make sure the state income withholding has been entered on the worksheet, and then prepare a state income tax return.

The funny thing about state returns is you can't go to the forms and just add a state return. In order to add a state return for this purpose you need to go to the Main Information page and in the middle of the page select and add the state returns you need. Following that, the forms will be shown on the left of the screen.

Entering royalties is one case where much of the work is manual. The Schedule E is entered manually, the 1099-MISC worksheet is manually selected, and the possible non-resident state return is created manually. Fortunately, these are exceptions. The software guides you through most of the return, so don't complain. When it doesn't, grin and bear it.