How to Report Oil & Gas Income on Tax Returns

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Unless you are the general partner of an oil and gas investment, which makes you personally liable for all debts regarding the investment and requires you to create and issue tax forms to the individual partners, you will receive a year-end tax form outlining the financial details of your oil and gas investment. There may be a number of entries you will have to make across a variety of tax forms, but if you follow the instructions, which will also be provided to you, you should be able to complete the task on your own.

Things You'll Need

  • K-1 form(s)
  • Assemble your K-1s. Any partnership investor is required to receive a K-1 tax form at the end of the year outlining the details of their investment. As the K-1 will generally have a number of entries that need to be transferred to various federal tax schedules, investors should consult the publication Partner's Instructions for Schedule K-1 or their tax adviser. Unlike forms W-2 and 1099, which are usually issued at the end of January, K-1 forms from partnerships often do not arrive in investors' hands until March because of the complexity involved in filing them.

  • Complete your tax schedules per K-1 instructions. Although the information on your K-1 will be reported separately to the Internal Revenue Service, it is up to the individual taxpayer to place the information in the right places on her own tax filings. Usually, oil and gas income shown on a K-1 is reported as passive income, and this will require completion of Schedule E, Supplemental Income and Loss. Another common entry on a K-1 shows net capital gain and loss, which should be reported on Schedule D, Capital Gains and Losses. Other, less common K-1 entries require transfer to Schedule A (Miscellaneous Itemized Deductions) and Schedule SE (Self-Employment Income). The instructions for Form K-1 outline these and other obscure possible entries.

  • Transfer the information to your Form 1040. Once you have transferred the relevant data from your K-1 to the appropriate schedules, you are one step away from completing your taxes. Follow the instructions on the various schedules to enter the relevant amounts in the correct places on your Form 1040. For example, if you have a net capital gain or loss from Schedule D, you will transfer that to line 13 of your Form 1040; if you have passive income figures on your Schedule E, enter them on line 17 of Form 1040.

References

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