Many people are hoping for a financial windfall as a result of leasing the mineral rights on their property for Utica shale exploration.
But if and when that money comes, experts say landowners should have a plan to help them make the most of it.
"You have to look at each individual situation and the family situation so carefully, because what applies to one may not apply to the next couple," said Randall Perry, certified public accountant and partner with Perry and Associates in Marietta.
There are reports of lease bonus offers in Washington and surrounding counties approaching $6,000 an acre, with royalty amounts for oil and gas actually produced higher than in years past. While that initial bonus payment may have some people imagining all the things they can buy, Perry said it's best to play it safe, because if the well doesn't produce, that may be all you get.
"You may never see any royalties from it, so you want to make sure that's the safe money," he said. "That is the seed money that really they shouldn't be blowing."
Perry and others recommend getting professional advice on not only how to save and invest that money but also how to deal with the taxes they'll be paying.
Easing the tax burden
Options for reducing the tax burden on lease bonus payments
- Consult a financial professional.
- Increase contribution to your retirement plan made before taxes.
- Purchase equipment for your farm or business.
- Spread the payment out over two or more years.
- Deduct a portion of the payment or payments up front to pay the taxes.
Source: Times research.
"Once you sign the lease, it's taxable income," he said.
Sometimes people start spending their newfound wealth without thinking about the taxes that will be due later, said Ron Eberhardt, president of Business and Estate Planning Unlimited in Grove City.
"There are a lot of things that can be done, but the taxes must be paid ahead of time," he said.
A sizable bonus payment could push someone into a higher tax bracket. The scope of the change depends on how much land is involved.
"It's different for the guy that has 200 acres than the guy that has 40 acres," Perry said.
There are ways to reduce the amount a person has to pay.
For example, a person could increase the contribution to his or her retirement plan so their taxable income decreases. Business owners could purchase equipment to improve their business, although the amount allowed to be deducted for this will decrease in 2013.
According to oilandgashelp.com, a website established by Northwest Bancshares Inc. in Warren, Pa., where the shale boom has been going on longer than in Ohio, having bonus payments spread out over two or more years rather than being paid all at once can also reduce the tax burden.
If multiple payments are received, a tax reserve account could be established to put aside money from each check to pay the taxes, the site says.
In some cases, Perry said, families might consider dividing ownership of the property so the income is spread between family members and each would be taxed at a lower rate. But whether that's the best approach depends on the dynamics of the family.
"That's also a very permanent thing, and a lot of people don't want to do that," he said.
If royalty payments follow, they are also taxable as well, but Perry noted they are subject to a depletion deduction of 15 percent. That's because the resource is being used over time, according to www.kiplinger.com.
As in dealing with one-time lease bonuses, Perry said, people can purchase equipment or fund their 401(k) at the maximum level to help reduce taxes over a longer term. There are also investment opportunities in things like tax-free municipal bonds and other tax-sheltered options, he said.
Eberhardt said sudden wealth can bring opportunities and burdens, but the money itself is not the true source of problems.
"It's more of a people issue than it is a financial or tax issue," he said.
To avoid those struggles, Eberhardt recommends landowners be cautious and informed.
"They need to get second opinions," he said. "They need to talk to people who have been there, done that and successfully protected what they have."
Parkersburg resident Bill Wotring's family owns 35 acres in Cutler and they are working with a landowners association in that area to negotiate a lease. Wotring said he definitely plans to consult a tax accountant if they receive a bonus payment to protect as much of it as possible.
"You certainly want to be very judicial and wise," he said.
Wotring doesn't expect the land to result in a massive windfall, but he said he would probably use what money they do earn toward paying off the mortgage on the property, which was purchased about five years ago.
If royalties or otherwise larger amounts of money would follow, he has a few ideas of what he would like to do, including paying off other property and investing in more, and perhaps even indulging his love of classic cars. But above all, Wotring said he would want to try to use the money to do something good.
"I look at it as a moral obligation to use it for the best purposes possible," he said.