Hi all -
This has been very informative, and I thank you all for your insights, information and scuttlebutt. I have a question, esp. aimed towards any cpas or tax lawyers out there. Is bonus income taxed as capital gains or straight income? There is a huge difference, of course. I believe we will receive a 1099 from the company, but I'm not sure. I have not received a 1099 from a company before, but this bonus is much larger than anything we've had in the past :-)
Thanks for any info and enjoy the Fourth -
I am not an expert in this field, but I did ask a professional when we leased. The bonus money is taxed as "rent" income and is fully taxable at whatever rate it puts you in added to your regular income. It is NOT taxed as capital gains, unfortunately. That is also the info we got at a meeting held in Many for landowners. There was a CPA there and he gave out tax charts so that everyone could see where the tax rates changed.
Thank you 4HTSG - oh dear. I suppose it could be considered "rent", but I thought it might come under some other heading. I'm going to do more digging, but if anyone else has any information, would love to hear from you - thanks!
I have spoken with 2 CPAs and one tax attorney and they all told me the same thing. The leases are "leases" and not a sale of real estate so the capital gains tax of 20% will not apply. I was told that to count on 40% of my signing bonus will be for taxes. I also asked what can I do to lessen the tax burden and again was told that there was very little that can be done to lighten the tax load, like to pay my state taxes this year instead of next April, etc. I was also advised that I would need to make sure that I pay an estimated tax payment as soon as I receive the signing bonus. Another item recommended was that I could set-up an LLC right before any well is actually drilled.
That is how I understood the advice I was given but you should speak to your own CPA.
Yes, you should check with your CPA but here's a bit of info also. Bonus money is ordinary income and taxed as such. You can make an estimated tax payment (the next one due is Sept. 15 based on income received as of Aug. 30) or....you can make sure you have paid in an amount (in a timely manner i.e. ES payment) equal to 100% of the taxes you paid last year in 2007 (which is probably less than what you would pay in 2008 due to extraordinary income received) and then settle up the difference you owe for 2008 when you file your tax return without a penalty. Here's a website for a rough estimate of tax liability on all income. Enter bonus money income on last line - Other Income.
If you could split bonus received into 2 different years taxes couldn't that help lessen total tax burden. Say , split payment into 2 parts , one in December and the other in January of the following year.If you had enough acreage it may keep you out of the next higher tax bracket. Do you guy's know if this is doable or if it would even be worth the trouble ?
It could possibly reduce taxes if split between 2 tax years. But payor would have to issue 2 checks, 1 in each year, and then you would receive 2 1099s, one for 2008 and one for 2009. To test numbers, using tax liability link from previous post, enter total $$ received in only one year. Then split it between 2 years to see if total of 2 years is less than calc of 1 year.
The question of splitting the check into two years was also brought up at the Many meeting. I believe they said it would work, but they did not know of any company that would issue the two checks in two different years.
I believe the chart Shaylon posted is the same as the one the CPA passed out at the Many meeting.
Representative Wayne Christian, an investment advisor from East Texas (can't remember what company), does a program on the Many radio station. He mentioned investing part of the money in a LLC that has something to do with energy.??? You could get a tax break for that. I didn't understand, but did ask my advisor at Edward Jones about it. My advisor would not encourage that. Maybe someone could give us more info about this.
The only way to "beat" the tax man on this is to sell your mineral rights before leasing. You are then taxed at the capital gains rates of 0% or 15% (for 2008), depending on your tax bracket. In the hot areas, the going rate for selling all of your mineral rights is 3 times the signing bonus offered (see other threads on this site).
You will need to do some calculations to figure your lease signing bonus plus estimated royalties, less estimated taxes, and compare that to what you could sell your mineral rights for, less the capital gains tax rate.
On the plus side, it would be "now" money, and you would be selling your risk also (in case of a dry hole, or low producing well), and you would giving less tax money for the government to squander.
On the down side, it would be less overall money in your pocket in the long run. You just have to ask yourself the question: How much is enough?
And no, I'm not a mineral rights buyer, just another overtaxed regular guy.
I have wondered if you have a cost basis on the oil or gas,i.e. if ng was $6.00 when I purchased the land but was $10.00 when I leased may I pay tax only on the amount the price has increased as in timber sale.
As exciting as this is, we know that we have a responsibility to do this thing correctly. After all, we want the farm to remain a place where the family can gather for another 80 years and beyond. This site was born out of these desires. Before we started this site, googling "shale' brought up little information. Certainly nothing that was useful as we negotiated a lease. Read More