Replies to This Discussion

Permalink Reply by 4HTSG on July 5, 2008 at 8:38

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.

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Permalink Reply by Timber Gal on July 5, 2008 at 9:14

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!

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Permalink Reply by insomniacnla on July 5, 2008 at 10:51

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.

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Permalink Reply by A. Banks on July 5, 2008 at 11:07

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.

http://www.dinkytown.net/java/Tax1040.html#calc

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Permalink Reply by Snake Stewart on July 5, 2008 at 11:27

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 ?

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Permalink Reply by A. Banks on July 5, 2008 at 12:00

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.

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Permalink Reply by 4HTSG on July 5, 2008 at 16:10

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.

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Permalink Reply by pilgrim on July 6, 2008 at 14:46

OK I guess I am a big dummy, but what does LLC stand for?

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Permalink Reply by Kassi on July 6, 2008 at 14:56

LLC = Limited Liability Company. Basically it is a private business that is set up so that the owner is not personally responsible for debt incurred by the business

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Permalink Reply by Jack Spratt on July 7, 2008 at 7:24

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.

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Permalink Reply by Jack B2 on July 24, 2008 at 10:07

Can you sell 75% of your minerals and retain 25% and negotiate 100% of the 25% retained under this example if you are inclined to sell your minerals out right? Just showing my ignorance here!

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Permalink Reply by old as dirt on July 5, 2008 at 9:20

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.

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