Oil and gas tax review

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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 and gas tax review

  1. 1. Oil & Gas Tax Reviewby Chad Bice, CPA, Director of Tax ServicesFebruary 22, 2012
  2. 2. 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?
  3. 3. 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
  4. 4. 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
  5. 5. 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
  6. 6. 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
  7. 7. 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
  8. 8. 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
  9. 9. 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%
  10. 10. 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
  11. 11. 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
  12. 12. Thank You!

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