How to offset some of the federal income taxes associated with lease bonuses

I have recently signed a lease and will be receiving my bonus before the years end. It looks like uncle sam is going to hit me pretty hard. Does anyone have any plans to reduce the amount of taxes on the lease bonuses?

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Permalink Reply by James L. Mitchell on October 20, 2010 at 11:52am
Called the IRS and must be turned in as "other income" and taxable at your Tax rate.You will receive a 1099 income statement from the Gas and Oil company.You cannot average over the 5 year lease period.
Permalink Reply by Jim Pollock on October 20, 2010 at 1:22pm
Thanks guys for all the great sugestions for decreasing my taxes. Keep them coming. I think this is something that all of us can benefit from eventually.


I doubt that I will ever get free gas because I signed a lease that does not allow them to drill on my property. They can drill under me but not on. I use an electric furnace now to heat my house because there is no natural gas available where I live. I am thinking of buying a new geothermal heating syastem with part of my bonus money. The irs will give you a 30% credit on your taxes for such a system. This will definitely reduce my taxes and hopefully reduce my heating bill. And the extra bonus is then I will have airconditioning in the summer. Presently I do not. Also these geothermal units heat the water in your hot water tank when you are using it for cooling in the summer.
Permalink Reply by cathy weightman on October 20, 2010 at 1:33pm
You should not do a lump sum payment, instead recieve partial payments per year for the duration of your lease aggreement. Getting a lump sum will put you in a higher tax bracket. Also, You can write off any travel expensive that you occur due to any meetings with landmen or your attorney
Permalink Reply by Frank on October 26, 2010 at 3:59am
Send me your bonus money, and for a 20% cut - I'll pay the taxes on it, and I'll send you the rest in three equal installments over the next year. That way, I will pay the taxes, and you will not. :-)
Permalink Reply by Ken Podlaszewski on October 27, 2010 at 5:15am
First and foremost of course, as many others here have wisely advised, obtain the assistance of tax professionals who are knowledgeable and experienced in this area. From the comments so far, it appears that there is not much flexibility; it's pretty much just taxable income for the most part.

Not trying to be funny here nor do I want to send this thread off on a political discussion, but the biggest thing you can do next week to reduce the taxes that cut into your $$ from bonuses and royalties is to elect officials who will not raise taxes (or who will even lower them). Fact is if the wrong folks get elected here in PA in a couple of weeks, their desire to tax the gas industry hard could really put a damper on the activities here in PA. Any additional taxes the state imposes will have either a direct or an indirect impact on the amount of $$ those who have leases will get.
Permalink Reply by Frank Walker on October 27, 2010 at 5:52am
Ken, I agree with your thinking . . . but only up to a point. Like you, I want to pay as little tax as is possible. My actual preference is for zero tax. But, sadly, there are at least two ways to pay zero tax. And one of the two alternatives is a disaster.

First, if we elect the right candidates and they choose not to tax us on our gas, then that's the best outcome. We win.

But the zero tax alternative I have to respect (and fear) goes a little differently:

We elect (whatever) candidates and somehow because of political pressures from extremists gas drilling is shut down in PA. Well, then many of us would pay zero tax. But we also would not be receiving any income from our Marcellus shale. The landowners in New York are in this fix today. I don't envy them, even though they pay no tax!!

So bottom line, zero tax is best PROVIDED drilling continues. But if it comes down to paying a small tax so drilling is (politically) allowed to continue, I will grudgingly pay the tax. 95% of something is a lot better than 100% of nothing!!! And if you don't believe me, just ask the landowners in New York.
Permalink Reply by Ken Podlaszewski on October 27, 2010 at 6:41am
Frank,

Your New York example is perfect. Thanks to their elected officials, New Yorkers will be loosing out on opportunities that have obviously gone elsewhere. New York is loosing out on a tremendous economic opportunity - but they do have zero taxes to pay.

Your point is especially relevant; I see that our Governor here in PA has just signed an executive order effectively banning gas development on state owned lands. Seems like a bit of a confusing move and many are speculating his motives are purely political punishment for the state Senate refusing to work a deal on thegas severence tax the administration so sorely wanted. In any case, with the stroke of a pen, huge potential revenues to the state have been nixed. I guess the upside of that is there will be more focus by the companies to develop private leases resulting in royalties to us private lease holders - as long as another executive order doesn't come along affecting development of private leases.

I know this sounds like it is venturing off the original thread topic, but not really. All the discussion on reducing tax impact here is reactive in the sense that the talk is only about how to deal with the current tax structure. Fact is, as much or more discussion should really be about how to proactively affect future tax impact. The officials we elect now are going to determine how we will be impacted by taxes going forward. It is important to be aware of your elected officials' positions and records regarding taxes, particularly relating to the gas industry. Find out how they stand on things that are in your best interest, vote accordingly, and see to it that they keep to their word.

And when the dust settles, consult a good tax expert 'cause as we all know there's probably no way they'll come up with a tax structure that allows us to avoid that. :)

BTW - I suspect there is a lot of gas activity currently on hold awaiting the results of the upcoming state elections and the resultant tax impact on the industry. Let's hope that the result will be responsible gas activity reaping economic benefits for the whole region.
Permalink Reply by Robert Davis on November 2, 2010 at 1:45am
Maximize your employer 401k (deposit your entire Dec income or add a check to maximize); maximize your deductable IRA; review all costs in obtaining the lease; hire the best qualified CPA after interviewing a few.

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