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cubuff85
New Member

Can I spread an Oil and Gas leases payment over the life of the lease or do I have to claim it all as income this year?

 
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KrisD
Intuit Alumni

Can I spread an Oil and Gas leases payment over the life of the lease or do I have to claim it all as income this year?

No, as a cash basis taxpayer, you need to claim it this year. Cash taxpayers claim income when they receive it.   

If you were a business, and the business was accrual based, (income is claimed when earned) the lease payment could be spread out for the years in which the income is earned. 

"Amounts received for upfront land leases that energy companies pay to permit drilling on the land are rental income for federal income tax purposes, which means the payments will be ordinary income. However, because the land is nondepreciable property, under Regs. Secs. 1.469-2T(f)(3) and 2(f)(10), the income is treated as portfolio income rather than passive income.

The lease payments are either made annually for the life of the lease or upfront at the beginning of the lease term. As cash-basis taxpayers, most individuals will have to pay tax on all upfront payments in the year received. Accrual-basis taxpayers will apply the all-events test, which may result in the income’s not all being immediately taxable. (For payments over $250,000, see Sec. 467, which requires accrual of rental payments in certain circumstances.) 

Income from lease payments can be reduced by related expenses, such as attorneys’ fees, property taxes, surveying fees, and title costs.

Higher-income taxpayers are subject to Sec. 1411’s new 3.8% investment income tax on this income. The tax applies to the lesser of the taxpayer’s net investment income for the tax year or the excess (if any) of the individual’s modified adjusted gross income for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers."

https://www.journalofaccountancy.com/issues/2013/nov/20138424.html

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1 Reply
KrisD
Intuit Alumni

Can I spread an Oil and Gas leases payment over the life of the lease or do I have to claim it all as income this year?

No, as a cash basis taxpayer, you need to claim it this year. Cash taxpayers claim income when they receive it.   

If you were a business, and the business was accrual based, (income is claimed when earned) the lease payment could be spread out for the years in which the income is earned. 

"Amounts received for upfront land leases that energy companies pay to permit drilling on the land are rental income for federal income tax purposes, which means the payments will be ordinary income. However, because the land is nondepreciable property, under Regs. Secs. 1.469-2T(f)(3) and 2(f)(10), the income is treated as portfolio income rather than passive income.

The lease payments are either made annually for the life of the lease or upfront at the beginning of the lease term. As cash-basis taxpayers, most individuals will have to pay tax on all upfront payments in the year received. Accrual-basis taxpayers will apply the all-events test, which may result in the income’s not all being immediately taxable. (For payments over $250,000, see Sec. 467, which requires accrual of rental payments in certain circumstances.) 

Income from lease payments can be reduced by related expenses, such as attorneys’ fees, property taxes, surveying fees, and title costs.

Higher-income taxpayers are subject to Sec. 1411’s new 3.8% investment income tax on this income. The tax applies to the lesser of the taxpayer’s net investment income for the tax year or the excess (if any) of the individual’s modified adjusted gross income for the tax year over a threshold amount. The threshold amounts are $250,000 for married taxpayers filing jointly and surviving spouses, $125,000 for married taxpayers filing separately, and $200,000 for other taxpayers."

https://www.journalofaccountancy.com/issues/2013/nov/20138424.html

View solution in original post

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