Common questions about depletion and handling of Oil and Gas in Lacerte

Table of contents:

Percentage Depletion is not appearing on Schedule E, even though Production Type is entered.

When the Production type (mandatory entry) field is used, Lacerte calculates percentage depletion for the activity. Since percentage depletion is subject to an Income Limitation (see the income limitation worksheet), it may not be allowed on the current activity.

If applicable, you can enter the Cost Depletion for the activity, which is not limited:

1. Go to Screen 18, Rental & Royalty Income (Schedule E).
2. Scroll down to the Oil & Gas section.
3. Enter an amount in the Cost Depletion field (input sheet code 43).

Calculating Mineral Depletion

When the Production type (mandatory entry) field is used, Lacerte calculates percentage depletion for the activity. Since percentage depletion is subject to an Income Limitation (see the income limitation worksheet), it may not be allowed on the current activity.

If applicable, you can enter the Cost Depletion for the activity, which is not limited:

1. Go to Screen 18, Rental & Royalty Income (Schedule E).
2. Scroll down to the Oil & Gas section.
3. Enter an amount in the Cost Depletion field (input sheet code 43).

Entering Oil & Gas Working Interest in an S-corporation (1120S)

S-Corporation module doesn't have an input field specifically designed for Working Interest. To add an item to Schedule K-1 for Working Interest as an Other Income item or Other Deduction item:

1. Go to Screen 20, Schedule K Income and Deductions.
2. Enter that into the field Other Income (Loss) (Ctrl+E) or Other deductions (Ctrl+E).
3. Select Code ZZ from the dropdown list for K-1 code
   • Code ZZ is Other income (loss) or Other deduction
4. Enter your desired description, Ex. O&G Working Interest.
5. Enter the applicable amount(s) in the Federal/State column(s)
6. Click OK at the bottom of the window.

Other Income items flow to the Schedule K line 10. Other deductions flow to line 12. A statement will generate to show the details that were entered in the description.

Entering Oil & Gas Book Depletion into a Corporate Return

Lacerte does have the ability to calculate Oil and Gas depletion automatically either on Tax or Book basis as needed. Lacerte needs an Oil and Gas activity, and potentially a depreciation asset to calculate the cost depletion. Oil and Gas activities are entered into Screen 19. A valid activity must have at least one Set with at least one Property. Use these steps to verify the required Oil and Gas activity exists or to create it if it's not already there:

1. Go to Screen 19.1. Oil & Gas.
2. Select the relevant set in the Set list on the left, or add a new one if it doesn't already exist.
3. The following entries are required for a valid Set. Verify these entries are present:
   • Set name
   • Form (Ctrl+T)
   • Activity name or number (Ctrl+T)
4. With the relevant Set selected, Select the relevant property in the Property list on the left, or create one if it doesn't already exist.
5. A valid property must have the following entries. Verify these are present:
   • Description of Property
   • Property number (Mandatory)
   • Production type (Ctrl+T)
   • Beginning reserves
   • Current year Production

With the activity created, you'll need a depreciation asset for Lacerte to calculate the cost depletion. Use these steps to verify a valid depreciation asset exists, or to create it if it doesn't:

1. Go to Screen 21, Depreciation (4562).
2. If an asset for that property already exists, select it in the list. If it doesn't exist, click Add on the left to add a new asset in the section Federal Depreciation. These are the required entries for a valid Oil and Gas depletion asset:
   • Description of Property
   • Form number (Ctrl+T)
     • Select Oil and Gas Property from the list
   • Activity name or number (Ctrl+T)
     • Select the relevant Oil and Gas property from screen 19 in the dropdown list. That will link this asset to the Oil and Gas property.
   • Category
   • Date placed in service
   • Cost or Basis
   • Book Depreciation (if diff. -1=none)
   • Method (Ctrl+T).
     • Select nonrecovery method 95=Units of Production (Oil & Gas).

The 2024 Book Depreciation Schedule will calculate book depletion using the beginning reserves and current year production for the selected property.

Ending Less Accumulated Depletion remains on the balance sheet when an asset has been fully depleted

Lacerte calculates the ending depletion on the balance sheet by:

1. Beginning of Tax Year amount
2. Add amount from new assets placed in service
3. Remove amounts from assets sold
4. Subtract current year depletion

If there's remaining balance at the end of the year and all assets have been sold or fully depleted, then either:

• The balance at the beginning of the year is incorrect
• The input on the assets are incorrect

If the beginning balance is incorrect, it can be corrected on the Balance Sheet input screen. If this is the case, it is recommended you review the prior year return, as the beginning amount typically proforma's over the value from the ending amount in the prior year. Its possible th ending amount was incorrect in the prior year.

Percentage depletion is based on the amount entered the field Gross Income on each property in the Oil and Gas screen. It is automatically calculated, and applies income limitation when applicable.

Cost depletion is is calculated based on depreciation assets entered in Screen 16, Depreciation. If an asset was incorrectly removed from either screen without having been properly disposed, its balance would remain on the balance sheet.

Lacerte can use either the Regular Tax figure or the Book depreciation for the balance sheet. To change that make an entry in the field Current year book depletion (Ctrl+T or amount) in Balance Sheet Miscellaneous. If this field is left blank Lacerte uses the Regular Tax figure.

If it's determined an adjustment is required, here's how to override the ending balance sheet:

1. Go to the Balance Sheet screen.
2. Enter the appropriate amount for the full depletion in the field Less accumulated depletion* in the Ending column.
3. This amount will offset the property amount entered in the field Depletable assets* in the Beginning column.