Working interests are percentages of ownership in the income from an oil and gas lease. Owners of working interests pay their shares of cost for leasing, drilling, producing and operating a well. A well operator is one of the working interest owners that physically controls well operations. All working interest owners share in the costs and select the operator. The well operator apportions income to each working interest owner after deducting operating expenses and intangible drilling costs. The well operator does not deduct the cost of well equipment. Working interest owners may deduct depreciation for their share of equipment costs and other ordinary expenses they paid. Income reported by the well operator less additional costs of a working interest owner is net self-employment income.
1. Calculate depreciation expense on the working interest ownership percentage of cost for any equipment purchased to operate the well. The well operator does not deduct this as an expense.
2. Record the amount reported by the well operator as net income after operating expenses and drilling costs.
3. Reduce the well operator's report of net income by the amount of depreciation.
4. Subtract any ordinary and necessary unreimbursed expenses paid as a working interest owner, such as travel expense to meetings with other owners of working interests. The final result is self-employment net income from the oil and gas working interest.
Items you will need
- Annual report from the well operator
- USLegal.com: Working Interest (Oil and Gas) Law & Legal Definition
- IRS.gov: Internal Revenue Manual
- "Oil and Gas: Federal Income Taxation"; Patrick A. Hennessee; 2008
- IRS.gov: Publication 334