Minimizing tax consequences...

I think there was a general discussion a while back but I can't seem to find it, so....

 

For those folks getting significant signing bonuses, how have you dealt with the tax consequences of being pushed into a higher tax bracket for the year you get the signing bonus? What about Alternative Mimimum Tax (AMT)? What other issues have you run into?

 

Same sorts of questions for royalty payments.

 

The reason I'm asking is that this gets into some specialized stuff and at least one accountant I spoke with was blowing smoke and clearly didn't have a clue about O&G income (signing bonus, royalty treatment, etc).

 

Mike

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Permalink Reply by Mirabelle Dictu on August 17, 2011 at 5:44am
Personally, if we do receive income from a lease or royalties I'll be more than happy to pay the tax. Of course I'd like to keep it all, but I do believe that paying taxes is the right thing to do for the country, or as someone said, an act of patriotism. JMHO. : )
Permalink Reply by Mike h on August 17, 2011 at 6:25am

If you truly feel that way then you should volunteer to pay more.... In fact, here is a link to help you out....

http://www.treasurydirect.gov/govt/reports/pd/gift/gift.htm

 

Permalink Reply by Mirabelle Dictu on August 17, 2011 at 2:45pm
Thanks, Mike, but I think I"ll stick to paying my "fair share". I'm not anything close to a Warren Buffett you know! Lol! Take care!
Permalink Reply by Ron Klingle on August 17, 2011 at 3:11pm

Some people negotiate the right to invest in the well.

 

That is where all of the tax deductions are.

Permalink Reply by Steven Gardner on August 18, 2011 at 8:14am

These are some of the basic things I have thoght about ..

 

You can only contribute abt $6000 per year (double if married filing joint) to a ROTH.. less if your under 50 and more if over.... so thats something

You can contibute 20% (of your self-employment income) to a SEP .. self employed pension plan

You can create a Health Savings Account HSA .. Like a Trad IRA but only used for medical expenses.. I really like this one.. not sure on the max contrib for each yr

If you file Schd C .. use the section 179 deduction for investing in new equipment the yr you get the money

Contribute to your favorite charity

Give some away...

 

All of which are better than giving it to Uncle

 

Permalink Reply by Mike h on August 18, 2011 at 8:20am

Steve,

That's why I was saying it is worth considering putting the O&G rights into a self directed ROTH. A year and a half ago people in my neck of the woods were signing leases with as little as $25/acre bonus money. The value of the potential royalties would be severely discounted because they have tod rill for you to get them. So a person with (ballpark) less than 100 acres in those circumstances could have put the asset in without much issue. Now the signing bonuses are $3,500/acre and it is highly likely that we will get drilled in the next few years (if only to hold by production).

 

Permalink Reply by Steven Gardner on August 18, 2011 at 10:42am

Mike.. I guess I'm not understanding you when you say "putting the O&G rights into a self directed ROTH" you mean the money from leasing your rights ? I thought you could only put money into a ROTH and that it is not an "entity" that you can lease from.. but I'm not a CPA

 

Its my understanding that the upfront bonus and any future royalties are considered ordinary income reported to you on 1099-Misc.. you then report that income on schd E

 

I don't about the AMT or when it kicks in but I've heard it can jump up and bite you.

I think too many deductions may play a part but it didn't seem to get GE last year...

they have more attorneys than I !

 

And just my $.02 but I don't see what they pay to lease has anything to do with how soon or if they include you in a drilling unit. Time will tell. Thanks to all .. good info on here !

Permalink Reply by Mike h on August 18, 2011 at 3:32pm

Steve,

Do a little research into self directed IRAs. (google "self directed ira") You would put the money into the IRA and then use the money to purchase the O&G rights. It is a little esoteric but should be possible.

 

You are correct about AMT. I fully expect to get bit by it when I do taxes next January.

 

And to your last point, for a long time companies were willing to pay small amounts per acre on a lease in places like Carroll County on the off chance it might be worth drilling. This was typically shallower plays like the Clinton formation. With the Utica, at least in Carroll County companies (mainly Cheasapeake but also Rexx) are paying a lot more now (although they picked up a lot of acreage cheaper before word got out) but are drilling aggressively. They don't want those leases expiring. That's all I'm saying.

Permalink Reply by Anthony Hunter on August 19, 2011 at 4:09am

#1  Consult your tax advisor prior to signing the lease.   A certified public account with years of experience dealing with issues on oil/gas income, not just one that is trying to capitalize on this recent boom.  Some use the self proclaimed title of "Expert" with no credentials to back it up.  Look for one with an advanced degree specifically in area of taxation. 

 

Don't forget that you just cannot pay the tax due with the tax return if it is over a certain amount.  You will need to make required estimated tax payments. 

 

It is important to whom the checks are make out to and the coresponding 1099's.  You want the option to prepare a mfs return verses a mfj return.  It can save on the Ohio tax.  So, if you are married you may have to receive one check in your name and one check in your spouse's name. 

 

Permalink Reply by Finnbear on August 22, 2011 at 4:49am

Below is a copy&paste from another post I made a couple weeks ago.

Lease bonus money is taxed as unearned (passive) income and will be in whatever tax bracket your AGI fits in. It is not all taxed at 42%. I believe Federal tax brackets are as follows:

$0-$16,750 = 10%

$16,750-$68,000 = 15%

$68,000-$137,300 = 25%

$137,300-$209,250 = 28%

$209,250-$373,650 = 33%

$373,650+ = 35%

If your income this year is approximately the same as last year (aside from the lease payment) then add your lease bonus payment to your AGI from last year to get a good estimate of your tax liability.

You also need to consider your state tax liability. In Ohio, tax rates are from 4.327% to 6.24% depending on your income.

Royalty income has a tax advantage in that you get a 15% depletion deduction so you only pay taxes on 85% of the royalty money.

If you get any sizeable lease payment you should hire a good tax adviser to figure out how to keep as much of it as possible.

Permalink Reply by scott peterson on August 22, 2011 at 4:53am
Thanks!
Permalink Reply by Mike h on August 22, 2011 at 6:48am

Finnbear,

The other thing in Ohio is local income tax which for me is 2% for the municipality I live in.

We are engaging with tax advisors to figure out 1) who makes the most sense and 2) what we should actually do. Not quitting our day jobs from the signing bonus but once they drill I have a feeling it will be a serious option.

 

 

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