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Lease bonus recipients may pay additional tax
YOUNGSTOWN
Those who received bonus payments from oil and gas leases in 2012 may have a little extra tax to pay on their 2013 state returns.
Individuals or couples earning more than $150,000 per year are subject to filing under the state’s Commercial Activity Tax, said Benjamin DiGirolamo, supervisor at Hill, Barth and King LLC, a Youngstown-based accounting firm.
Those who earned between $150,000 and $1 million will pay a flat rate of $150 in commercial activity tax to the state. Earnings of more than $1 million are taxed at .26 percent.
“The majority of those who have to pay the CAT tax will have to pay $150,” DiGirolamo said.
It’s important that people realize if they received a bonus payment, they will have to register with the state for the commercial activity tax, and then cancel that account if royalty payments are not made for a couple of years or if their taxable income, even with royalties, falls below $150,000, he said. Once royalty payments begin, they may have to register again.
The state decided that by signing a lease with an oil and gas company, an individual has become part of the oil and gas business for tax purposes, DiGirolamo said.
Those who signed leases also may want to look at real-property-tax implications. Oil and gas are considered by the state to be real property, said Stan Dixon, deputy tax commissioner for the Ohio Department of Taxation.
“A complicated formula creates a tax factor for oil and gas. This tax factor is used in calculating a value of the remaining reserve,” he said.
Oil and gas value is taxed the same way as any type of real property, Dixon said. If mineral rights were deeded to the oil company, they will receive the tax bill, but if rights were leased, the lease agreement will state who is responsible for paying the tax.
There are other issues that those who received bonus or royalty payments should understand.
The bonus payments come with no standard deduction and must be paid as income tax, said George Millich, a tax attorney for Harrington, Hoppe & Mitchell LTD, a Youngstown-based law firm.
“Those who receive royalties can get a 15 percent depletion deduction, and that comes right off the top,” DiGirolamo said.
There is no depletion deduction available for bonus payments, Millich said.
Bonus recipients are not likely to, but could have to make prepayments to both federal and state taxing agencies, he said. Individuals need to check to make sure their income did not increase so much they have to prepay taxes to the state and federal government.
“Although it is unlikely, based on prior income requirements, that most of those who received lease bonuses would have to file,” DiGirolamo said. Prepayments are more likely to become necessary when people begin receiving bonus payments.
Capital gains taxes also are unlikely to be an issue for those who signed oil and gas leases because there is no transfer of property, Millich said. Capital-gains taxes are not going to occur for any property owner who maintains a royalty interest, DiGirolamo said.
Each situation is different based upon that individual’s total economic profile. Landowners can use losses in other businesses to offset financial gains from lease bonuses or royalties, said Del Harlan, executive administrator of personal and school district income tax division of the state deparment of taxation.
More information about the state’s commercial activity tax is available at http://tax.ohio.gov/commercial_activities.aspx.