I have a tax client who invested in Oil & Gas last year through their financial planner who picked out the program for my client. Below is the relevant information from their Schedule K-1:

Individual general partners, 1st year, with ending capital account $1,525 (=$10,000 - $8.475) Box 1 $38 - Ordinary Income

Box 13 (J) $8,499 - Intangible Drilling Cost (IDC)

Box 13 (W) $14 - Specially Allocated Depreciation

Box 14 (A) -$8.475 - Self Employment Loss

Box 14 (C) $48 - Net Earning from Self Employment

Box 20 (T) $7 - Depletion for Oil & Gas

I'd like to know if I am putting these numbers correctly and so far here is what I have based on my research:

$38 - Schedule E Line 28 Column J (non-passive income);

$8,499 - Schedule E Line 28 Column H (non-passive loss;

$14 - Schedule E Line 28 Column H (partnership interest expense);

-$8,475 - Schedule SE Line 2 (Net Loss);

$48 - no where (no self employment tax);

$7 - Schedule E Line 28 Column H (not sure??)

Are these correct? Also the partnership filed schedule K-1 to state of MI, PA, and IN. Does this mean the client is required to file individual income tax return to all of these states? The client is a resident of GA.

Any expert advice out there would be greatly appreciated.

Filips Suandi

Atlanta, GA

asked 30 Mar '10, 04:26

Filipus%20Suandi%20EA's gravatar image

Filipus Suan...
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edited 30 Mar '10, 18:51

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TaxQueries ♦♦

Filipus - I am sorry to tell you that you in over your head with this one, my friend. It doesn't get much more complicated or convoluted than OIL & GAS partnerships.

Generally your client will be considered a GENERAL partner UNTIL the rigs start to produce, then he'll convert to a limited partner.

The BIG tax draw to these things is that while he is considered a General Partner he gets to deduct all the losses AND THE IDC EVEN when they exceed his investment - remember, General Partners get basis from loans as well as contributed capital.

I CANNOT tell you in this forum whether your doing this right or not - it is far too complicated (for me) to address here. If someone else wants to give it a shot, by all means have at it.

My recommendation to you would be to EXTEND this return and deal with the intricacies AFTER 04/15 when you'll have time to get past the learning curve and do the job correctly.

Remember, the ethics of our profession require that we EITHER HAVE or be able to acquire the requisite knowledge necessary for each engagement. I'm sure you can LEARN what you need to know. I'm NOT sure it can be done under the pressures of tax season.

Good luck


answered 31 Mar '10, 16:10

EAgent's gravatar image

accept rate: 6%

Yes I agree with you that it is complicated. I have done two days research on this online and have a federal tax booklet filled with information regarding oil & gas that is 150 pages long. Should this is an existing oil and gas investment that requires partnership conversion from general into limited and depletion calculation of ongoing investment, I would probably wait until after the tax season to get all of the information necessary to prepare the return. However, this a new investment and I am lucky enough to have it to start from the beginning.

(04 Apr '10, 14:03) Filipus Suan...

You are on the right trach and appear to have most of it correct, however, here are a few comments:

The total loss for $8,475 is reportable on Schedule E and consists of ordinary income $38, IDC $8,499, and specially allocated depreciation $14 (not interest expense).

Line 20T for $7 is gross income from the property which is necessary for calculating depletion. Statutory depletion is most likely 15% and deductible against the ordinary income, however, it is only $1 ($7 x 15%).

Line 14c for $48 represents gross nonfarm income which is utilized in the calculaton of SE tax on Schedule SE.


answered 01 Apr '10, 19:46

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Brent Berkman
accept rate: 13%

Brent, After doing my own research I did realize about the $14 and has added this into schedule E column H with $8,513 total non-passive loss.

I am with you on the $7 for depletion calculation (safe harbor 15%) of $1. I thought this would be ordinary income as well and thank you for confirming with me.

I meant to say, $48 on Schedule SE (short schedule) Line 2, but not SE tax (less than $400).

Any idea on the state returns? I assume for now there is no requirement to file (income is way below threshold-will research).

Thanks again to both for replying.

Filipus Suandi Atlanta, GA

(04 Apr '10, 14:47) Filipus Suan...

One consideration with regards to nonresident state tax filings is based upon whether or not net operatng loss carry-overs can be utilized in subsequent years in order to offset taxable income in the State jurisdiction. (Returns need to be filed in order to preserve the NOL.)

(04 Apr '10, 14:55) Brent Berkman
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Asked: 30 Mar '10, 04:26

Seen: 4,613 times

Last updated: 01 Apr '10, 19:46