oil and gas tax review

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!