Presentation highlighting the tax and other issues related to oil & gas leases and other agreements - Rea Associates - Lima OH

1. Oil & Gas Tax Review
by Chad Bice, CPA, Director of Tax Services
February 22, 2012

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. 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. 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. 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. 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. 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. 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. 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. 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. 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. Thank You!