Mineral Royalty Backup Withholding Act
Information for Mineral Royalty Owners
Under a new Montana law, anyone who makes mineral royalty payments to a resident or non-resident from property located in Montana must withhold tax from those payments if applicable production thresholds are met. Senate Bill 439, known as the Mineral Royalty Backup Withholding Act, was enacted by the 2007 Montana Legislature. The withholding requirements will become effective on January 1, 2008.
It is important to note that mineral royalty owners will not owe additional tax as a result of the Mineral Royalty Backup Withholding Act. The legislation simply requires that the applicable state tax be withheld at the time the royalty payments are made and then be claimed on the income tax return filed by the mineral royalty owner at the end of the tax year.
If the entity that leases your property meets the applicable overall production thresholds necessary to require the withholding of state tax from mineral royalty payments, the following information will help you to understand how this new law may impact you as a mineral royalty owner.
- Montana income taxes will be withheld at the rate of 6% of the net royalty amount, beginning with the payments sent to you for the January 2008 period. This concept is similar to taxes withheld from an employee’s wages.
- Because tax will be withheld on your mineral royalty payments, you may want to consider adjusting your quarterly estimated tax payments beginning with the 2008 tax year, if applicable.
- A federal Form 1099-MISC will continue to be issued to you by January 31 of each following year. Line 16 of this form will reflect the state tax withheld. If you have state taxes withheld for several states, please note that the applicable code for Montana is 30.
- Because Montana income tax will be withheld from your royalty payments beginning with 2008, this will affect your Montana income tax filing requirements beginning with that tax year:
- The mineral royalty income is taxable and, accordingly, it will be necessary to continue to report it on your tax return as such. Beginning with the 2008 tax year, you also will report the mineral royalty tax withheld for Montana income tax purposes, as shown on line 16 of the Form 1099-MISC, on your Montana income tax return.
- You will include the amount of the tax withheld in the area designated on the applicable 2008 income tax return depending on whether you are a C corporation, trust, individual or other filing type. It will either be reported on a separate line or included with any other Montana income tax withheld.
We look forward to working with you to make this new law as easy and convenient as possible. Please call our department at (406) 444-6900 if you have any questions regarding your income tax filing requirements.
