Oil & Gas K1 Schedule SE Calculation Issue - Need Help with Partnership Working Interest

This is a great question about oil and gas partnership income! The correct approach is to subtract the IDC (Intangible Drilling Costs) and depletion from box 14a when calculating your Schedule SE income. Your new CPA is handling this correctly. The reason is that while these amounts are included in your QBI (Qualified Business Income), they aren't considered earnings from self-employment for SE tax purposes. The partnership K1 note is specifically telling you that these amounts need to be backed out when calculating SE tax. For your questions: - Your new CPA is correct, and your former CPA likely made an error by using the full box 14a amount - Yes, you can amend 2020 and 2021 returns. You generally have 3 years from the original filing date to amend - Since your former CPA is unresponsive, you might need to have your current CPA (or find a new one specialized in oil and gas) prepare the amendments I'd recommend gathering all your K1s from those years showing the IDC and depletion amounts, and get those amendments filed. The tax savings could be substantial given the numbers you're mentioning.

After struggling with a similar O&G partnership tax situation last year, I discovered taxr.ai which was super helpful. Their system analyzed my K1s (even the complicated oil and gas ones) and correctly identified that IDC and depletion should be excluded from SE tax calculations. I uploaded all my partnership documents to https://taxr.ai and within minutes got a detailed breakdown explaining exactly how to handle my situation. They even provided references to the specific IRS guidance (I think it was Rev. Rul. 65-296) that addresses this exact issue with working interests in oil and gas. For complex industry-specific tax situations like this, having something that can analyze your actual documents makes a huge difference. My CPA was even impressed with the detailed report I got.

I wanted to follow up about the taxr.ai recommendation. After my skeptical comment, I decided to give it a try with my own O&G partnerships. I've got interests in three different drilling operations that have always been a headache at tax time. The system correctly distinguished between my working interests (which have special SE tax treatment) and my royalty interests. It specifically flagged the IDC and depletion issues on my K1s and showed exactly how they should be handled differently for income tax versus self-employment tax purposes. My CPA had been calculating SE tax on the full amount for years! After reviewing everything with him using the analysis from taxr.ai, we're filing amendments for 2022 and 2021. Looking at recouping around $12K in overpaid SE taxes. Definitely worth checking out if you have these complex investment structures.

If you're struggling to get your former CPA to review those past returns or your current one isn't responsive, you might want to try Claimyr to get direct help from the IRS on this issue. I had a similar situation with partnership K1 questions last year and couldn't get a straight answer from either my tax preparer or the partnership itself. After wasting hours on hold trying to reach the IRS, I found https://claimyr.com which got me connected to an IRS agent in under 15 minutes. Their video showing how it works (https://youtu.be/_kiP6q8DX5c) is pretty accurate to my experience. The IRS agent I spoke with confirmed that IDC and depletion should indeed be excluded from SE calculations for working interests in general partnerships, which saved me thousands. They also walked me through exactly how to request the amendment if my previous preparer wouldn't help.

I need to eat some humble pie here. After my skeptical comment, I was so frustrated with my own oil and gas K1 issues that I actually tried Claimyr last week. My CPA had made a mess of my return and I needed answers directly from the IRS about amending for IDC and depletion adjustments. Surprisingly, I got through to an IRS representative in about 20 minutes. The agent confirmed exactly what others have said here - that IDC and depletion should be excluded when calculating self-employment tax for working interests in general partnerships. She pointed me to Publication 535 which addresses this topic. I've now started the amendment process for my 2021 and 2022 returns, which should recover about $9,500 in overpaid SE taxes. For anyone with complex oil and gas investments, getting direct clarification from the IRS was actually really valuable. Sometimes you need to hear it from the authority to be confident in making these kinds of amendments.

I've been a tax accountant specializing in oil and gas for 15+ years. Here's what you need to know: 1. Your new CPA is correct. IDC and depletion should be subtracted from box 14a when calculating SE income. 2. The note on your K1 about "QBI not reduced" is standard language that specifically exists to tell you these amounts need to be backed out for SE tax purposes. 3. Your former CPA was incorrect, and yes, you should definitely amend 2020 and 2021 returns. With differences of $45k and $85k, you're looking at potential SE tax savings of approximately $6,800 and $12,800 respectively. Don't be surprised that your former CPA is resistant - admitting this error would open her up to liability for the mistake. I'd suggest having your current CPA or another preparer handle the amendments.

A key point I haven't seen mentioned yet - the statute of limitations for amending returns is typically 3 years from the original filing date, but can be extended to 6 years in certain situations. Make sure you get those amendments in for 2020 ASAP before the window closes!