Tax Law (Questions About Taxes)/Oil/Gas Well Royalties

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Question
John-

   I really appreciate your time in fielding these questions that I have stumbled upon on this website.  I have a questions regarding royalties received from oil and gas well drilling on my father's property.  Quite frankly it seems like a no-brainer the investment is done by the drilling company with no liability on my father's behalf.  My question(s) however, lie with the potential tax implications.  There is so much uncertainty and I just wanted to make sure he is covered by the law.


Do you think it would be beneficial to set up an LLC and run the royalties through here rather than the 1040?  This is not counted on income, whatever comes from it is slush money or just may go into an investment for other family members.  Am I assuming correctly that the only taxes that would be incurred from this method would be when a distribution is taken?  Also, my dad is retiring 1/2013.  If he were to take this an individual and if this endeavor would find to be a, "gold mine" could he make "too much money" and be penalized?

My other reason for the LLC is even though the drilling company states there is no liability to the land owner, I have had nightmares regarding something happening to the well and my dad being on the hook, I figured this would be another layer of protection.  This is probably a questions best suited for an attorney I just thought maybe you have clients that you work with that my instance may ring a bell.  And advice/assistance you can offer will be greatly appreciated.

Thanks!appreciate

Answer
Tim,

Thanks for your question.

I can think of no good reason to establish an LLC.  An LLC is a disregarded entity for tax purposes. It would involve fees to maintain the LLC and another layer of complexity. You can choose to have it taxed as a sole proprietorship, an S Corp, or a C Corp.

If you choose S corp, you must pay a salary which would involve payroll taxes and withholding, etc.  If you choose C corp, you must make a distribution of the income as dividends or be subject to penalties in addition to paying corporate tax and personal tax.  Just run it through the 1040 on Schedule E and pay the tax.

I do not see liability as an issue.

Additional income would not affect SS, a 401(k) plan, or an IRA except to the extent it would be taxed at a higher rate simply because he is in a higher tax bracket.

Hope this helps.

John Stancil, CPA

Tax Law (Questions About Taxes)

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John Stancil, CPA

Expertise

I can answer questions on personal income taxes, partnerships, and some corporate income taxes. I can deal with some state tax questions. Limited gift and estate tax questions. I am also familiar with ministerial and church tax reporting issues. I am Professor Emeritus at Florida Southern College. Sales taxes and property taxes are state and local issues so I am not likely be be able to give you an in depth answer on those types of taxes. I have maintained a CPA practice, specializing in tax, for over 35 years. I am a member of the National Association of Tax Professionals, The Florida Insititute of CPA's, The NCPE Fellowship. In addition I am a Certified Mentor for SCORE. Visit my website at www.mybaldcpa.com. I also offer seminars and consultations to churches and clergy on their tax issues at www.churchtaxsolutions.com Also visit my blog, www.thetaxdocspot.com. I am listed on Tax Connections at https://www.taxconnections.com/profile/John-Stancil/12258973 Prepare and file your own taxes at www.1040stancilcpa.com

Experience

I hold a doctorate in Accounting, and am a CPA. My certifications of CIA, CFM, and CMA are inactive. I passed all certification examinations on the first attempt, and received honorable mention for my scores on the CIA exam. I have operated a CPA firm for over 37 years and have taught accounting and tax at the college level for over 35 years.

Organizations
FICPA, NATP, NCPE Fellowship, Lakeland Business Leaders

Publications
The CPA Journal, Florida CPA Today, Green Consumer, Green Business, Global Sustainability as a Business Imperative, Palmetto Review, NATP TaxPro Quarterly, Mustang Journal of Finance and Accounting.

Education/Credentials
DBA University of Memphis MBA University of Georgia BS in Accounting Mars Hill University

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