Go to File > Open Client and open client ROYALTY. In this example, John Lewis has a royalty interest in a producing well and receives a 1099-Misc from XYZ Oil Company.

Data Entry

1. In the input screens, go to the Rent & Royalty folder to create a royalty activity.
2. On Screen Rent, the Description, T,S,J, State, Type of property are completed. Option 6 = Royalties is entered in the Type of property field to designate the activity as a royalty activity and not a rental.  
3. Go to Screen OGCost to create a cost center. This step is necessary for all oil wells even if there are no overhead expenses.
4. On Screen OGCost the Description field is completed. The Overhead allocation method and Overhead expenses fields can be completed if necessary. In this example, we will leave them blank.
5. Go to Screen OGwell to create an oil well.
6. The Description is what is used to identify the well on worksheets and reports. The cost center established in step 3 is selected in the Cost center # field. The well number in the Well/Lease # must be a unique number if multiple wells exist for the activity.

   Note: The Production type field will default to P=Primary (15%). To specify a different type of percentage depletion, enter the applicable code in this field.

7. $15,000 of royalty income from the 1099-Misc has been entered in Gross income or royalties received field. $675 has been entered in the Production taxes field.

Results

After following these steps, switch to Forms View to view the Oil/Gas Well Schedule in the Oil folder. Part I and Part II of the Oil and Gas Well Schedule will calculate and display the well's taxable income of $14,325 before depletion. Part IV of the Oil and Gas Well Schedule will apply the 15% depletion rate, based on Production type, and will calculate the percentage depletion deduction after the 65% income limitation. 

Additional reports and statements are available to review by previewing the client by choosing File > Preview. Look under Oil/Gas and Depletion Reports for reports that detail depletion for regular and AMT tax, the Oil and Gas Well Schedules, and statements showing the 65% taxable income limitation for depletion percentage calculation. 

Go to File > Open client and open client WORKING. In this example, Jack Martin has a working interest in an oil well. This example will cover setting up multiple oil wells, cost depletion, and creating an asset to calculate intangible drilling costs (IDC).

Data Entry

1. In the input screens, go to the Business folder to create the working interest activity to be reported on Schedule C. 
2. On Screen C, the general information regarding the Schedule C is entered including state, business code, and who owns the working interest between the taxpayer and spouse.
3. Go to Screen OGCost to create a cost center. This step is necessary for all oil wells even if there are no overhead expenses.
4. The Description, Overhead allocation method, and Overhead expenses are entered on this screen. The overhead expenses are allocated among applicable wells.
   
5. Go to Screen OGwell to create the first oil well.
6. The Description is what is used to identify the well on worksheets and reports. The cost center established in step 3 is selected in the Cost center # field. The well number in the Well/Lease # must be a unique number if multiple wells exist for the activity. In this example, the well is located in Texas which is why TX is entered in the State in which well is physically located field.
   

   Note: The Production type field will default to P=Primary (15%). To specify a different type of percentage depletion, enter the applicable code in this field.

7. If there are excess intangible drilling costs, enter the number of months in the Number of months in production field if less than 12 months. This field will default to 12 months if left blank. If any of the IDC expensed are excluded from the excess IDC preference, mark the Dry hole well field. In this example, we will leave these fields blank for Well #1.
   
8. In the Lease Income and Expenses section, $800,000 is entered in Gross income or royalties received field. Some lease expenses are entered too. For this well, there are some IDC but they will be amortized later in step 14. As a result, we are leaving the Int. Drilling Costs: Expensed field blank.
9. In the Cost Depletion section, $60,000 is entered in both the Leasehold cost or other basis and Accumulated depletion fields so there will be no cost depletion for Well #1. If the amount of accumulated depletion for AMT purposes is different than regular tax purposes, enter the amount in the AMT accumulated depletion field. Both the Accumulated depletion and AMT accumulated depletion fields will proforma.
10. A second well has been added by pressing Ctrl+A to create a new unit. Click on the OGWell tab to switch to the second unit, Well #2
11. The Cost center # is still linked to our original cost center set up in Step 3. 2 is entered in the Well/Lease # since it is unique from Well #1.
12. In the Lease Income and Expenses section, $100,000 of income has been entered the Gross income or royalties received field. Production taxes and Lease operating expenses have been entered too. Well #2 is expensing IDC, $800,000 has been entered in the Int. Drilling Costs: Expensed field.
13. In the Cost Depletion section, Leasehold cost or other basis, Beginning reserves in barrels, and Current year production in barrels are entered in order to calculate cost depletion. If the Beginning reserves in barrels or Current year production in barrels are unknown, use the Expected production life of well/lease and Average price per barrel in current year fields to use the Alternative Cost Depletion method. UltraTax CS will generate a report that shows the cost depletion calculation.
14. Click on the Asset tab to review the asset entered in for amortized IDC. Modify the asset and review the Depreciation tab and Other tab to see the IDC expenses. This asset is linked to Well #1. For detailed steps on entering an oil and gas asset, see Entering an oil and gas well asset.

Results

After following these steps, review the Oil/Gas Well Schedules, in forms view, in the Oil folder. Select the schedule for Well #1. Part I and Part II calculates the well's net income (IDC on line 6 is coming from Step 14). Part III does not calculate any Cost Depletion because the accumulated depletion has reached the amount of the cost. Part IV does calculate the Percentage Depletion. UltraTax CS will optimize the cost depletion and percentage depletion and display the allowed depletion in Part V of the schedule. For Well #1, Part V will display the allowed percentage depletion amount calculated in Part IV. 

Next, review the schedule for Well #2. Part I and Part II calculate a net loss for the well. Part III and Part IV will calculate the Cost Depletion and Percentage Depletion. Due to the net loss, the percentage depletion is disallowed. UltraTax CS will optimize the cost depletion and percentage depletion and will include the deduction on Part V of the schedule. 

Finally, review Schedule C to see the final depletion expense.

Go to File > Preview to review Oil/Gas statements and Depletion Reports. These reports will detail calculations for 65% income limitation for percentage depletion, IDC calculations, and cost depletion calculations.

Tim Johnson is a shareholder in an S Corporation and a partner in a partnership. This example will detail how to enter in oil and gas information into an 1120S and/or 1065 client and pass the oil and gas information through to a shareholder's 1040 return. The data entry steps in business clients are very similar to the data entry steps in a 1040 client in UltraTax CS. Minor differences will be discussed in this example. The following steps can be reviewed in clients OILCORP (1120S) and OILPART (1065).

Data entry in business clients

1. In the input screens, go to the Rent & Royalty folder. 
2. On Screen Rent, the Description, Type of activity, and Type of property are filled out to classify the activity as a royalty activity.
3. Go to Screen OGCost to create a cost center. This step is necessary for all oil wells even if there are no overhead expenses.
4. Go to Screen OGWell to enter well information. In this example, there are some income and expense items for the well.
5. For a working interest in the business client, go to Screen OGCost in the Income & Deduction folder. A separate cost center is set up for a different location.
6. Go to Screen OGWell. There are multiple wells established with income and expense items. You can select different wells by clicking the OGWell tab.

Results

After reviewing these inputs, switch to forms view, by pressing Ctrl+F, and review the Oil/Gas Well Worksheet. Similar to 1040 clients, UltraTax CS will optimize the depletion deduction between percentage depletion and cost depletion. However, in the business clients, the percentage depletion deduction is not subject to the 65% percent income limitation as it is in a 1040 client. Along with that, the depletion deduction will not be reported on Form 1120-S or 1065 since it will be used on the shareholder's/partner's 1040 return. 

Preview the return by going to File > Preview. The preview will generate depletion reports which are used to detail well income and depletion calculations. Also, the Shareholder Oil and Gas Well Income Report will generate for each shareholder in the S Corporation. The Shareholder Oil and Gas Well Income Report will be used when entering oil and gas information in the shareholder's tax return. In this example, we will be using the reports for Tim Johnson. These reports can be printed or sent to FileCabinet CS for easy access while entering oil and gas information in the 1040 client. The 1065 client will generate the Partner's Oil and Gas Well Schedule to be used in the 1040 client.

Next we are going to review the data entry steps in the shareholder's return. Go to File > Open Client and open client PASSTHROUGH.

Data entry in 1040 client

1. In the input screens, go to the K1 1065, 1120S folder and choose the Oil S Corp K1 unit. This K1 unit is from client OILCORP.
2. On Screens K1-K1-7 enter the information from the K1 issued to the individual. In this example, the K1 was data shared from OILCORP.
3. Go to Screen OGCost to create a cost center. This is required regardless if there are overhead expenses or not. The oil and gas cost centers and wells do not data share from business clients. They will have to be manually entered on this input screen. 
4. Both cost centers from the S Corporation should be entered on this screen. 
5. Go to Screen OGWell to enter oil and gas well information. Refer to the Shareholder Oil and Gas Well Income Report printed from client OILCORP to enter the well income and expenses.
6. In the Percentage Depletion section, the Oil/Gas well net income from the Shareholder Oil and Gas Well Income Report is entered. This field is required for the percentage depletion calculation when oil and gas information is from a pass-through entity, but is not used in calculating income on the tax return.
7. Press Ctrl+A to add a new unit and add the additional wells.

   Note: The Well/Lease # does not have to match the well number used in the wells entered in the business clients. However, the Well/Lease # must be unique for each well.

8. Repeat these steps for the second K1 unit Oil Partnership from client OILPART.

Results

After reviewing the inputs, review Oil/Gas Well Schedules for each well to see the net well income and depletion expenses. For details regarding the total calculation of well income and depletion expenses, review the depletion reports by previewing. Choose File > Preview to preview the client. 

The other examples detail how to enter in oil and gas information into 1040, 1120-S, and 1065 clients. This example will briefly detail how to enter oil and gas information in 1041 and 1120-C clients. The input steps are very similar to the other entities. See the other examples for advanced details. This example will use clients OILCORPC and OILTRUST.

Data Entry

1. To enter an oil and gas working interest, go to Screen OGCost in the Income and Deductions folder (Income folder for a 1041 client) to create a cost center. This step is required even if there are no overhead expenses.
2. Go to Screen OGWell to add a new well. The number entered in the Well/Lease # must be unique for each well in the activity. 
   
3. Review the income and expenses entered on Screen OGWell. Click the OGWell tab to select a different well. 
4. To enter royalty income from oil and gas, go to the Rents & Royalty folder.
5. On Screen Rent, review the Type of activity. Choose Royalty to designate the activity as a royalty activity. 
6. Go to Screen OGCost to create a cost center for the royalty income. This is required even if there are no overhead expenses. 
7. On Screen OGWell, enter the well information.

Results

After reviewing the input, switch to forms view, by pressing Ctrl+F, to review the Oil/Gas Schedule. UlttraTax CS will optimize percentage depletion and cost depletion as it does in other entities. Also, the 1120-C and 1041 clients will apply the 65% income limitation to the percentage depletion calculation. Choose File > Preview to preview the client. Review Depletion Reports and Oil and Gas Statements for detailed calculations.