Treatment of depletion on partnership return

[nwempe]

Trying to determine if we're treating depletion and excess depletion correctly on the partnership K-1s. Instructions say increase partner basis by "depletion in excess of basis (other than for oil and gas depletion) and then decrease partner basis by depletion. Why does the "increase" say other than for oil and gas depletion?

[PhoebeRoberts]

Because technically, O&G depletion is calculated entirely at the partner level. For tax-basis capital accounts, you can either adjust by book depletion or by tentative depletion to the extent of basis (which are generally the same number).

Is this a distinction entirely without a difference? Yup.

[nwempe]

So can you briefly walk me through exactly how you treat depletion and depletion in excess of basis on Item L, Partner's Capital Account Analysis? I thought we were fine with our treatment up until this tax year 2021 and something got more complicated for some reason. We might possibly be just over-thinking the issue though. Thanks!

[PhoebeRoberts]

You're overthinking. The way you've been doing it is just fine. There has been no change to the underlying theory of how depletion affects tax-basis capital accounts.

[KenKling]

Since the partnership capital accounts must be reported on a tax basis, should Depletion in Excess of Basis on a partnership return reduce the partner's capital account? This particular issue relates to depletion on royalty interests. (Notice 2019-66) 

[PhoebeRoberts]

I personally only adjust partnership capital accounts by book depletion. Even the partner's outside basis isn't reduced by depletion in excess of basis.

[KenKling]

Thank you.  I am trying to determine why Lacerte is reducing the capital account by the amount of Depletion in Excess of Basis.  Is it a problem with the software?

[PhoebeRoberts]

You need to enter book depletion in the Balance Sheet Miscellaneous screen. I haven't done my O&G 1065s yet this year, so don't know if there's any unusual new entry.