Royalty is reported on Schedule E -- "Rent and Royalty Income"-- and the gross royalty, before deducting severence taxes, gathering and compression costs, gets a 15% depletion deduction.
If you later sell the mineral interest, that would be subject to capital gain tax.
Either the accountant was confused or you misunderstood what he said.
I think I misunderstood. What is the "upfront money"? If it is payment for the right to drill, without knowing whether the well will produce, then it IS ordinary income.
The accountant did correct himself. The term "upfront money" was exactly that .... The gas company is offering 2,000 and acre to drill on an individuals land. That is ordinary income, he later corrected himself. My question is ... when they find gas what about the royalty received? Currently 12% royalty is being offered, the accountant said, that this is subject to capital gains. I disagree, I think it goes on the schedule e and u deduct % of production costs, but I want to research it more.
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