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 16, 2011 at 1:42pm
Mike, Having already gone through this a couple years ago, I must inform you that since you are now considered to be rich you get to pay the full tax burden on not only your up front money but also on the royalty. There is absolutely NO WAY to reduce your taxes. It will positively make you become a Republician overnight! Good luck and invest wisely. Debuckmaster
Permalink Reply by Mike h on August 17, 2011 at 5:25am

I believe there are ways but they take planning ahead and being proactive.

 

For example, if one can seperate the oil & gas rights and move them into a self directed ROTH IRA then a lease from the ROTH IRA to a third party would result in the signing bonus and royalties flowing into the ROTH IRA. I am not a lawyer nor am I an accountant but I do know of some pretty unusual assets in self directed IRAs.

Another approach to mitigating tax consequences would be to take the bonus money and leverage it into a wind turbine project (we have one of the higher hills in Carroll County on our property). There is currently a 30% tax credit available. I know in Ohio there is also a state tax credit available. First Energy and others have state mandates to provide a certain percentage of electricity from renewable sources and are having difficulty meeting those requirements. So a long term contract should be possible to arrange. The aforementioned factors should enable the ability to finance the project.

The above mentioned wind investment strategy is interesting because if you hold the investment for a year and then sell the income becomes capital gains. In order to make this work one would need to get your signing bonus money towards the beginning of the year so that you have time to pull everything together and bring the turbine online in a timely manner for tax purposes.

I wish I had done some planning ahead in order to better minimize taxes but I do believe that there are strategies that can be used to minimize taxes - it just takes some thought and planning.

One other point for everyone to remember is that the 3.9% surtax on investment income  (associated with Obama Care) kicks in on January 1st, 2013.

Permalink Reply by Steve on September 9, 2011 at 9:50am

I have the same considerations about renewable energy but instead of wind I'm thinking ground source heat pumps, solar hot water, and solar power.  All have tax credits and more importantly accelerated depreciation schedules.  For systems put in place in 2011 you take all the depreciation in year 1.  For 2012 you get 50% bonus depreciation in year one and the remainder on a five year accelerated schedule.  It would be a great way to minimize taxes and get a decent return on your investment year after year for the next 20 years.  Geothermal and solar work just about everywhere.  Not so for wind.  Geothermal and solar can be done quickly.  Not so for wind.

 

Aside from having property in Southwest PA I also have a design build engineering firm.  If anyone would like to discuss opportunities related to investing in geothermal and solar, let me know.

Permalink Reply by Mike h on September 9, 2011 at 9:59am
The reason I suggested wind is (commercial) scale of projects. The wind turbine that Lincoln Electric recently installed was on the order of 2.5 megawatts (roughly a $5.9 million dollar project.
Permalink Reply by Steve on September 9, 2011 at 10:23am
We do commercial geothermal and solar.  The geothermal is obviously limited to the building loads.  Solar PV on the other hand could be scaled to any budget.  I've envisioned acres of solar panels on our property.  A transition to a solar farm.
Permalink Reply by time will tell on September 11, 2011 at 6:02am
very well put .
Permalink Reply by James L. Mitchell on September 10, 2011 at 2:47am

Michael J. Belai: You have my sympathy as the "TEA BAGGERS" are dead,Executed by the Texas Gov,Perry. Liberal Jim!  Union member for 50 years, plus a 4 year Veteran in the Korean war, and proud of it.

Permalink Reply by Keith on November 12, 2011 at 2:57am
Mike, I had come with the same Roth idea as you did. The hard part is getting people to understand what you're asking! Have you had any luck with that concept? I hadn't pursued it with any "professionals" but it's now getting close to crunch time- I hope.
Permalink Reply by Aaron Brown on August 17, 2011 at 5:56am
The slam dunk on bonus pmts is deducting any legal or professional fees you incurred in negotiating your lease.  truth is, esp w landowner groups, that expense can be minimal, or sometimes even zero.  Many on this board and many who receive either up front bonus $ or royalties are farmers that file a Sch F and operate on the cash basis of accounting.  Should you be such a person, you can certainly do your best to minimize or show a negative Sch F.  Is that 50 yr old tractor youve been holding together w baling wire seen better days?  Now is the time to upgrade.  Roof on straw shed been patched for the 100th time?  Put up a new one.  Make full use of your Sec 179 deduction.  Pre-pay for fuel, seed fert before year-end.  Yes, none of these are free of course, but you have your check , and you will have buy all these things eventually.  this is definitely the year to do it.  If you don't know what the cash basis of accounting is or section 179 property, make and appt with a good tax accountant now.  PS - you can deduc t their fees too.
Permalink Reply by Dave on August 17, 2011 at 7:21am

Is oil and gas income reported on Schedule E,  the same as income and expenses from rental property?   If so, can my schedule E losses on rents directly offset royalty and bonus income?

Permalink Reply by Mike h on August 17, 2011 at 7:56am

My understanding is that oil and gas income (royalties and signing bonus) are reported on Schedule E (1040).

I have heard various answers regarding whether you can take a section 179 deduction against your schedule F income using the O&G money unless you have a profit from your schedule F income (so essentially a right pocket left pocket kind of thing). I know I'll have a loss on schedule F this year so my understanding is that I won't be able to take advantage of what Aaron suggests.

Permalink Reply by Anthony Hunter on August 19, 2011 at 4:14am

With regards to section 179 mentioned earier, it is limited to the taxpayer's total taxable income from the active conduct of any trade or business (schedule C and/or schedule F).  Schedule E is considered passive income.    Excess Sec 179 depreciation from a farm cannot be used to offset passive income on Schedule E. 

 

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