As companies continue to seek out opportunities in the Marcellus and Utica shale region, some landowners have begun to wonder whether they are being fairly compensated for their cooperation, whether their assets are secure and whether the income they are generating from this relationship is being optimally managed. Oftentimes, these landowners aren’t fully aware of the opportunities at their disposal. Fortunately, by working with those who have been impacted by Ohio’s oil and gas boom, we have been able to identify a Four Pillars Strategy to help landowners realize their full earning potential from such agreements.
Pillar One: Income Tax
As you would expect, working with a certified public accountant (CPA) is the best way to navigate the tax code. But did you know that your CPA is a great source for advice when it comes to developing an income tax strategy that reflects more favorably on your bottom line while ensuring complete compliance? There are certain liabilities associated with mineral rights but also an opportunity for some great tax savings. For example, you may be able to contribute to a charity of your choice and treat the charitable contribution as a deduction on your personal income tax return. Is your property also a working farm? If so, do you need new equipment or a new building? A CPA can identify tax savings associated with your business-related purchases.
Additionally, there are a multitude of tax complexities when it comes to pipeline agreements and royalty income that a CPA can handle.
Pillar Two: Asset Protection
Oil and gas companies are reaching out to you because you are the owner of the coveted mineral rights. While ownership deeded in your personal name(s) can be financially beneficial, it can also set you up for risk. As a way to offer our clients protection and additional tax benefits, our second pillar strategy relates to asset protection. Oftentimes, we will recommend that clients deed their mineral rights into a limited liability company (LLC) and distribute ownership among family members. Doing so will protect your personal assets from economic and/or environmental liabilities that may be incurred by the LLC while providing further protection from other personal financial issues such as bankruptcy, divorce, medical costs, etc.
Pillar Three: Transfer of Wealth
Transferring mineral rights to an LLC also streamlines the transfer of wealth to the next generation. For example, you can gift/transfer ownership units of your LLC to a family member. In doing so, the transferred units of the LLC may be eligible for a minority discount, which can help the party doing the gifting preserve more of their lifetime gift tax exemption. You can also accomplish an income tax savings strategy known as income tax spreading. After gifting the units to younger family members, taxable income may end up in a lower tax bracket. Your CPA will work with you, and the other LLC owners, to take steps to preserve your lifetime gift tax exemption while working to also minimize your taxable income.
Pillar Four: Revenue Royalty Auditing
The final pillar represents your right to be paid what you are due from the oil and gas companies. We conduct royalty audits to ensure there were no mistakes made by the company when determining your share of the royalties. If we come across a mistake, we will work with all parties to make sure that you receive the refund that is owed to you. Even if we are unable to uncover additional revenue, some clients consider this to be one of our most valuable services simply because we are able to provide them with peace of mind.
Sometimes it’s hard to trust the unknown … and oil and gas companies bring a lot of unknown information and unfamiliar business strategies along with them when they come to town. The Four Pillar Strategy gives clients the protection they need while helping to generate the revenue that’s rightfully theirs. Email Rea & Associates to learn more about how the Four Pillar Strategy can help you grow your wealth.
By David Shallenberger, CPA (Wooster office)