What to Do If You Strike Oil or Gas

Landowners across Ohio have been coming to us with what we can only describe as a “good problem to have.” Oil or natural gas has been found below their properties and companies are interested in buying or leasing their mineral rights.

Suddenly these private, keep-to-themselves landowners have substantial offers on their doorsteps and they don’t know what to do. Coming to us is a good first step. Aside from consulting a tax professional, what should you do if you strike oil or natural gas?

Be Prepared to Pay Taxes

Any lease payments that you get for your mineral rights will be treated as ordinary income, meaning you’ll pay the same percentage of income tax on them as you do on your regular income. Everyone’s looking for a way to avoid these taxes; sorry to be the bearer of bad news, but it’s doesn’t exist.

Depending on your tax bracket and how big your bonus is, you should expect to pay about 35 percent of your lease bonus in federal income taxes.

Aside from the federal income tax, you will also need to pay state income tax, commercial activity tax and possibly municipal tax. Of course, there may be some strategies to mitigate your tax liability or estate tax burden and talking to a professional (ideally before you sign your lease) can help you to keep your taxes to a minimum.

Get Networking

You may be feeling like you won the lottery, but you’re not the only one with the lucky ticket. Lots of Ohio landowners, many of them farmers, have sold or leased their mineral rights.

As so many of their members have become involved in oil and gas deals, the Ohio Farm Bureau Federation is taking an active role in educating and connecting landowners. Local, usually county-wide, landowner groups are also popping up around the state; these groups can be great sources of information and can help build common bonds between other landowners, putting you on more even footing in negotiations with the big oil and gas companies.

Create a Financial Plan

Depending on your situation, your mineral rights could be a one-time infusion of cash or could produce a long-term income stream. If the latter, you may want to consider setting up a trust or some other type of entity for the benefit of your heirs.

There are other considerations that may be made for the benefit of future generations. The future revenue stream may offer significant opportunities to reduce gift and estate taxes. If you already have an estate plan in place, you will need to adjust it to account for this new source of funds.

This article was originally published in Producing Profits: Financial News for Oil & Gas Producers, a Rea & Associates enewsletter, 5/10/2012.

Note: This content is accurate as of the date published above and is subject to change. Please seek professional advice before acting on any matter contained in this article.