Can I claim QBI deduction for Oil & Gas Royalties from inherited trust?

The question of whether Oil & Gas Royalties qualify for the QBI deduction can be tricky. Generally, passive income like royalties doesn't qualify for the QBI deduction. However, there's a specific exception for certain oil and gas activities. For your situation, there are two key factors: 1) Are these royalties connected to a qualified trade or business? and 2) How is the trust structured? Since you're receiving distributions from a trust that holds the rights (rather than owning the rights directly), the trust's classification becomes important. The 1099-MISC you received reporting the royalty income is the starting point, but you'll want to check if the trust also provided a Schedule K-1, which would show how the income should be treated for tax purposes. If the royalties are classified as portfolio income rather than business income, they typically wouldn't qualify for QBI.

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If you're having trouble getting clear answers about your QBI for oil royalties, you might want to talk directly with someone at the IRS who specializes in these issues. I was in the same boat last year - spent hours on hold trying to reach someone who actually understood oil & gas tax issues. I finally tried https://claimyr.com and was honestly shocked that I got through to an IRS agent in under 15 minutes. There's even a video of how it works: https://youtu.be/_kiP6q8DX5c. The agent I spoke with had specific expertise in natural resource taxation and walked me through exactly how to report my working interest vs. royalty income properly on my return.

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I've been dealing with oil & gas royalties for years. Here's a simplified explanation: royalty interests (where you just get a percentage with no costs/obligations) generally DON'T qualify for QBI. Working interests (where you bear some production costs) CAN qualify. The key is how your deceased relative's interest was structured. Ask the trust administrator specifically if these are royalty interests or working interests. Also, request the complete Schedule K-1 from the trust - it should indicate how the income is classified.

Has anyone actually claimed QBI for oil royalties and been audited? I'm worried about claiming this deduction and then getting flagged.

The key distinction everyone's mentioning about working vs. royalty interests is crucial here. Since you mentioned the trust "divides it up between all the relatives" and you're receiving monthly payments, this sounds like it could be structured as royalty interests rather than working interests. However, don't give up on QBI entirely yet. There's also Section 199A(c)(3)(B) which allows certain rental real estate activities to qualify for QBI if there's sufficient participation. While oil & gas royalties are different from rental real estate, some taxpayers have successfully argued that certain mineral extraction activities can qualify under similar principles. I'd recommend getting copies of the original lease agreements and trust documents to understand exactly what type of interest your husband's uncle held. Look for language about who bears the costs of extraction, development, and operations. If the trust or beneficiaries have any responsibility for these costs (even if minimal), you might have a stronger case for QBI treatment. Also, consider that even if the income doesn't qualify for QBI, you might still be able to deduct depletion allowances which can provide significant tax benefits for mineral interests.