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Help minimizing taxes on oil and gas contract
Old 07-03-2018, 08:44 AM   #1
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Help minimizing taxes on oil and gas contract

My DW and he brother recently inherited some property that has oil and gas rights. The existing contract with the current oil and gas company is going to expire so we have an opportunity to renegotiate the contract.

My BIL has been looking into how this works and what they might be able to get for the drilling rights and the monthly percentage when/if drilling starts.

Long story short, the current understanding is if we sign a contract with the company for a period of time (probably 10 years) we will get a signing bonus. We believe this will come in as ordinary income.

I still work and plan to for at least another 5 years. We are currently in the 24% tax bracket but this signing bonus will push us into the 32%-34% tax bracket. The monthly drilling percentage may also put us into these brackets annually although we don't know exactly how this will be characterized from a tax point of view.

So, here are my questions.
  1. Can the signing bonus be spread out over many years to minimize the tax hit?
  2. Any other way can we minimize taxes on the signing bonus?
  3. Should we use some other entity (LLC, Trust, etc.) to run this through?
  4. How is the monthly drilling percentage characterized?
  5. Anyone have experience with dealing with oil and gas rights/companies?

John
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Old 07-03-2018, 09:20 AM   #2
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What did your accountant advise?
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Old 07-03-2018, 09:24 AM   #3
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We're in the process of talking to our accountant. We have our first meeting set up for after the 4th of July weekend.

I was hoping to get some ideas/experiences from this group to help educate us before that meeting.
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Old 07-03-2018, 09:26 AM   #4
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my nephew (attorney) writes up these contracts on the energy company side, lots of details
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Old 07-03-2018, 09:47 AM   #5
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Yes, there are complications well beyond the tax point of view. We are realizing the previous contract my FIL signed many years ago was borderline illegal. FIL was elderly and signed through a family "friend" that acted as a middle man.
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Old 07-03-2018, 10:10 AM   #6
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Originally Posted by JohnKeating View Post
Yes, there are complications well beyond the tax point of view.
You aren't kidding. I get a legal "reporter" (basically, recent opinions from the state appeals and Supreme Court) from Oklahoma and every month there are at least 4 or 5 oil land lease contract issues. The lower courts aren't normally reported, so I can only assume that there are LOTS of disputes of these types keeping the courts humming on along...
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