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Presentation highlighting the tax and other issues related to oil & gas leases and other agreements - Rea Associates - Lima OH
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Oil & Gas Tax Reviewby Chad Bice, CPA, Director of Tax ServicesFebruary 22, 2012
Oil & Gas Tax Review
The typical tax related questions consist of:Are the lease bonuses, royalties, or other payments I
may receive taxable income?
If taxable, are there preferential rates or treatment?
Should I take the payment now or over 5 years?
Are there any write-offs I can take to offset the taxable income?
Oil & Gas Tax Review
Taxation of Lease Bonuses
Taxed as advance royalties
• Form 1099
No special tax rates-ordinary rates
No percentage depletion is allowed
Oil & Gas Tax Review
Taxation of Delay Rentals
Taxed in the nature of rents received
• Form 1099
No special tax rates-ordinary rates
No percentage depletion is allowed
Oil & Gas Tax Review
Taxation of Royalties
Taxed as ordinary income
• Form 1099
No special tax rates-ordinary rates
Percentage depletion is typically allowed
Not subject to self employment taxation
Oil & Gas Tax Review
Taxation of Working Interests
Self employment income
• subject to SE Tax
Also, taxed as ordinary income
• Form 1099
No special tax rates-ordinary rates
Percentage depletion is typically allowed
Oil & Gas Tax Review
Should I take the payment now or over a 5 year period? Consider the following:
Time value of money
Ability of company to pay
Risk of higher tax rates
Your situation over next 5 years
Oil & Gas Tax Review
Are there any write-offs?
A truck or tractor? Maybe, Maybe Not!
Write offs that can save tax $$$
• Retirement contributions
• Health savings accounts
• Geothermal systems energy credits
• Itemized deductions
Oil & Gas Tax Review
Example Wages & Lease Bonus, Standard deduction, Married filing joint
Married filing joint Case 1 Case 2 Case 3
Combined wages 100,000 100,000 100,000
Lease bonus received - 100,000 200,000
AGI 100,000 200,000 300,000
Federal Tax 12,500 38,750 70,185
Ohio Tax 3,267 8,416 14,110
Marginal federal tax rate 25% 28% 33%
Marginal Ohio tax rate 5% 5% 6%
Oil & Gas Tax Review
Example Wages (less maximum 401(k) deferral) & Lease Bonus, Standard deduction,
Married filing joint
Married filing joint Case 1 Case 2 Case3 Combined wages 100,000 100,000 100,000 Less 401(k) deduction (33,000) (33,000)Lease bonus received - 100,000 200,000 AGI 100,000 167,000 267,000 Federal Tax 12,500 29,510 59,295 Ohio Tax 3,267 6,707 12,165 Federal tax savings - 9,240 10,890 Ohio tax savings - 1,709 1,945
Oil & Gas Tax Review
Conclusion:
Great opportunities out there
Plan, Plan and Plan-from a personal, legal and a tax perspective
• There is no one size fits all solution
• No two situations are alike
Invest wisely and reap the benefits well into the future
Thank You!