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 Patrick DeBerry on August 24, 2011 at 2:31pm

Mike, WOW! I bet you didn't expect all this when you first asked about the tax consequences of bonus payments or eventually royalities. As I understand your question, you were asking how to reduce your tax burden on these "new found riches". The ATM tax as well as yearly cost averaging went away some years ago. You can deduct the cost of your tax preparer's fee from your federal income tax but, I'm calling BS on deducting any legal fees from your income. You can load up to the maximum your IRA accounts but, ONLY after you have paid the taxes (see finbear's post as to the rates used to calculate your owing.) Any other suggestions as to prepaying this or that or gifting is really a left pocket right pocket thing. In other words you have to spend money to save money. If that theory worked, I would have been a millionaire years ago from all the money my wife "saved" me from the sales rack at Target. I'll check into the C corp. OBTW- instead of forming an LLC (which has it's own set of issues) have the lease money or royalities paid in equal shares to all the parties with seperate checks. Then everyone pays their own taxes. Good luck to all.

Permalink Reply by bill h on August 24, 2011 at 11:42pm

ATM tax ? 

 

The AMT, alternative minimum tax, did not go away

Permalink Reply by Patrick DeBerry on August 25, 2011 at 1:21am

Right you are Bill. However, The laws governing the AMT have changed over the years. A predecessor Minimum Tax was inacted by the Tax Reform Act of 1969 to basically force millionaires who were paying little or no taxes to pay their fair share. Significant changes were made in 1982 (see Ronald Reagan's first term) and other notable but less significant changes have been made over the years. I remember talking with my tax advisor when we were dealing with this situation in 2009 but, don't think it was going to save us any tax. I'll give him a call for a refresher course and let you know why that was his advice. A rather lengthy and confusing read on the AMT can be found on Wikipedia. Let us all know if you think it would help in your case. Thanks for correcting my error.

 

 

 

 



Permalink Reply by Finnbear on August 25, 2011 at 2:09am

Any expenses (including legal fees, title work, etc.) incurred in obtaining an oil and gas lease can be deducted from your increased tax liability caused by the signing bonus. These are about the only deductions available to the average landowner who obtains a lease.

Permalink Reply by Anthony Hunter on August 25, 2011 at 6:09am

If you pay yourself a salary then you have Social Security tax, Medicare Tax, Federal Unemployment Tax, State Unemployment Tax, possibly city and/or school district tax, and Workers Compensation.  You will need to file quarterly payroll reports, and year end W-2's.  So now you have increased your tax liability.  Both halves of Social Security and Medicare are 13.3%, FUTA is $56 a year max, plus the other taxes. 

 

If the income is Ohio sourced income you will still have to pay Ohio Commercial Activity Tax on it even if the corp is in another state. 

 

Also, if the company received more than 60% of its income from rents, royalties and so forth, then it is considered a personal holding company.  The PHC tax for 2011 on undistributed earning is the highest individual tax rate of 35%. 

 

You should definately talk to a Certified Public Accountant who specializes in taxation so you can decrease your tax liability, not increase it.

   

 

Permalink Reply by Mike R on September 13, 2011 at 2:44pm
Anthony,

I formed a C Corp so that I can pay the lowest upfront taxes on the bonus. Also, the C Corp salary is paid out over a period of time so that payroll taxes are less than paying personal taxes on a lump sum at the highest personal rate. It all depends on the person’s situation, income, possible deductions that can be used, and the bonus amount. Again, a CPA is the best way to go to assess the pros and cons.
2s72s0k9mm8gdPermalink Reply by 2s72s0k9mm8gd on November 23, 2011 at 11:27am

Just wanted to bump this back up for the benefit of new members who may not have found this.

Thanks for this info Finnbear.

Also , in PA I don't think local tax applies as it is called Wage tax , not Income tax........?

(it ain't all bad here in the "land of taxes"...PA , that is)

Anyone , please correct me if I am wrong.

Permalink Reply by Wayne Miller on August 25, 2011 at 4:06am

 I'd like to expand this discussion to payments for pipeline ROW. The pipeline company says the compensation is for "damages" and therefore not taxable. Can you really cause $6500 damages to land worth at most $3000?

Anyone already had experience with this?

Permalink Reply by Mike h on August 25, 2011 at 4:34am

Wayne,

Getting slightly off topic... If you have not signed the agreement yet make sure that there are clauses specifying a minimum depth (4 feet) and that they are required to double ditch (keep top soil and undersoil seperate) when they trench and last but not least that they need to grade and reseed.

Permalink Reply by Anthony Hunter on August 25, 2011 at 5:30am

I would not rely on what the pipeline company says unless they agree to represent you in tax court.  Finding yourself a qualified CPA should be priority #1. 

 

Look at IRS pub 225, page 17, Easements and right-of-ways.  This is an example in the middle of the page. 

 

Furtheremore, in general, damages could be considered a return of basis.  The amount received is only not taxable if you have adequate basis in your property.  If you do, they you may reduce your cost basis in the property by the by the amount of payment received.  Report it on Schedule D, or form 4797 as a sales price of xx and a cost basis of the same for potentially a zero gain.  If you sell thie property later on, you will need to note your new basis.  It is reasonable to say that anything that affects a capital asset results in a capital gain or loss.

 

You mentined the land is worth $30,000.  This number does not have much to do with the tax consequences at all.  The important number is your cost basis, and the amount received for damages. 

 

 

Permalink Reply by Garrett S. Hoge, RFC, CFP, MS on August 28, 2011 at 11:26am
Mike,
See my post several months ago called, "Financial Planning For Landowners" posted on this website. You can search the article on the top right box. This article was published in Farm & Dairy, & other local magazines. If you need help you can call our office for a free consultation. We are located in Southpointe in Canonsburg, PA. H Financial Management.
Garrett S. Hoge RFC, CFP, MS.
Permalink Reply by rex roae on August 30, 2011 at 1:48am

Not sure if a 1031 Like Kind Exchange would be applicable here but it might be something you'd want to talk to a CPA about.   When I'd invest in timberland, after I sold the timber and the real estate, any profit would be set aside thru my accountant(couldn't receive the money into my own account according to the rules).  I would have 6 months to purchase another parcel of real estate or timberland and any profit from previous transaction used towards the new purchase would defer any taxes.  Also as long as the new property was held for ar least one year, any profit received from that parcel would be subject to capital gains(15%) as apposed to personal income tax.  If 6 months passed without finding a new investment parcel, I would have just had to pay income tax on that money.

 

 

According to my accountant, I could have also used the proceeds to invest in a home, live in it 2 years and get the $500,000 personal home allowance therefore negating any previously deffered capital gains tax making my tax liability 0%(as long as the profit wasn't over $500,000.

 

 

 

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