Tax Management

Jan

09

2012

Can I Avoid Paying Taxes on Oil/Gas Payments?

By Chris Zoller, Chris Bruynis & David Marrison, OSU Extension Educators & Peggy Hall, Extension Specialist, Agricultural Law

The leasing of land for oil and gas drilling throughout eastern Ohio has provided landowners with substantial revenue. OSU Extension has received many calls from landowners asking how they can avoid paying taxes on these payments. The quick answer is that there are very few ways to avoid paying taxes on lease bonus payments or royalty income. Oil and gas revenue payments are classified as Miscellaneous Income and are subject to both federal income and Ohio taxes (and should be reported appropriately).

Taxation on Lease Bonus Payments: Cash payments received by the landowner prior to drilling, commonly referred to as lease bonus payments (typically paid on a per acre basis) are considered ordinary income for tax reporting purposes and are subject to ordinary income taxes. These payments might be made on an annual basis each year of the lease’s primary term, or could be made as a lump-sum payment that combines all annual payments into one payment made upon executing the lease. All lease payments are reported to landowners on IRS form 1099 MISC, Box 1, Rents. Lease payments must also be reported on page 1 of Schedule E, Supplemental Income and Loss. This amount then flows to line 17 of IRS Form 1040 and is not subject to any self-emplo...
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January 2012, Tax Management

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Jan

09

2012

Financial & Tax Implication of Oil & Gas Leases Meetings to be held

by David Marrison & Clif Little, OSU Extension Educators OSU Extension is pleased to offer Financial & Tax Implication workshops in selected counties during the winter of 2012. These workshops will help landowners understand the financial and tax implications of oil & gas leases/royalties. These meetings will help participants become more aware of the potential tax implications of leases and royalty payments. Don’t get caught blindsided by the taxes which will be due. Learn which payments are subject to ordinary income taxes versus capital gain; about the percentage depletion deduction; and how signing a lease may affect your CAUV status. Learn how the IRS handles oil & gas payments. Learn what questions to ask and receive financial planning tips for managing the potential income from these wells. The following meetings have been scheduled: Thursday, January 19, 2012 Ashtabula County Extension office 9:30 to 11:00 a.m. This class is already sold out. Thursday, February 16, 2012 Mid East Career & Technology Center in Buffalo, Ohio (Guernsey County). 6:00 p.m. For more information: contact Clif Little at 740-489-5300 or 740-732-5681. Tuesday, February 21, 2012 Trumbull County Extension office 9:30 to 11:00 a.m. More information can be obtained by calling 440-576-9008 or click here for the Tax Implications of Oil & Gas Meeting Registration Form Thursday, February 23, 2012 Ashtabula County Extension office 9:30 to 11:00 a....
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January 2012, Tax Management, Upcoming Events

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Dec

10

2011

IRS Announces 2012 Standard Mileage Rates

WASHINGTON — The Internal Revenue Service on December 9 issued the 2012 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2012, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be: • 55.5 cents per mile for business miles driven • 23 cents per mile driven for medical or moving purposes • 14 cents per mile driven in service of charitable organizations The rate for business miles driven is unchanged from the mid-year adjustment that became effective on July 1, 2011. The medical and moving rate has been reduced by 0.5 cents per mile. The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for more than four vehicles used simultaneously. ...
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January 2012, Tax Management

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Dec

04

2011

2011 Farmer’s Tax Guides Available at OSU County Extension Offices

by David Marrison, OSU Extension Educator Do you need a resource to answer those tough farm tax questions? If so, farmers can receive a free copy of IRS Publication 225, the 2011 Farmers Tax Guide, at their local county OSU Extension office. The 2011 Farmer’s Tax Guide is an 89 page publication which explains how the federal tax laws apply to farming. This guide can be used as a guide for farmers to figure taxes and complete their farm tax return. Some of the new topics for the 2011 tax year which are included in this publication are: standard mileage rate, start-up costs back to $5,000 in 2011, increased section 179 expense deduction dollar limits, special depreciation allowance, self-employed health insurance deduction, lower self-employment tax rates, maximum self-employment net earnings, and new medicare tax rates. More information can be found at the IRS website at: http://www.irs.gov/publications/p225/index.html Part I of Schedule F (Form 1040) has been revised for 2011, and the line numbers for reporting farm income are not the same as in prior years. The payments reported on lines 1a and 2a for specified sales of resale or raised products are those received through a merchant card or a third-party network. These generally will be reported to the farmer on Form 1099-K, Merchant Card and Third Party Network Payments. Merchant cards include, but are not limited to, Visa® and Master-Card®. Third-party networks include, but are not limited to, Paypal® and Go...
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December 2011, Tax Management

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Nov

30

2011

Year End Farm Record Keeping Issues

By: Chris Bruynis, Assistant Professor & Extension Educator, OSU Extension. With the size and scope of many farm businesses today keeping accurate farm records are more critical than ever. The first reason to prepare accurate farm records is to allow management to make critical management decisions. Farm records are needed to determine resource use efficiency, which in turn indicates whether or not the farm business is profitable. Farm records, including enterprise analysis, are also essential for planning and decision making for the business. A second reason for keeping farm records is for income tax management. Good records are needed to accurately determine potential tax liability and allows for tax planning before the end of the fiscal or calendar year. Poor farm records will typically result in increased tax liability of the farm owner. Obtaining credit is the third reason for keeping farm records. Good financial information provides lenders the necessary information needed to make lending decisions. In addition to determine the amount of the loan, this information is helpful in determining the interest rate a farm business owner may pay. Characteristics of a Good Record Keeping System The characteristics of a good record keeping system include easy to use and records the necessary information detail. Depending on the complexity of the business, the amount of detail will vary. Some businesses will want to keep detailed records down to the enterprise or lo...
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December 2011, Financial Management, Tax Management

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Nov

29

2011

Farmers will notice changes to the Schedule F

by David Marrison & Chris Bruynis, OSU Extension Educators

Part I of Schedule F (Form 1040) has been revised for 2011, and the line numbers for reporting farm income are not the same as in prior years. The payments reported on lines 1a and 2a for specified sales of resale or raised products are those received through a merchant card or a third-party network. These generally will be reported to the farmer on Form 1099-K, Merchant Card and Third Party Network Payments. Merchant cards include, but are not limited to, Visa® and Master-Card®. Third-party networks include, but are not limited to, Paypal® and Google Check-out®. The IRS instructions for Schedule F (Form 1040) state that merchant card and third-party network transactions are to be reported on line 1a or 2a even if a Form 1099-K is not received. Other sales of commodities are reported on lines 1b and 2b.

Click here to access the Form 1040-Schedule F for 2011

Click here to access the 2011 Farmers Tax Guide

December 2011, Tax Management

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Nov

29

2011

Year End Farm Tax Questions

by David Marrison, OSU Extension Educator As winter approaches, it is a good time for Ohio farmers to grab a cup of coffee and start to gather their income and expenses records to determine their cost of production and profitability from 2011. It is also the time to take a peak at their potential income tax liability for the year. This article addresses some of the questions which our Ohio AG Manager team has received with regards to income taxes. I just signed a lease with an oil company to give them the rights to drill into the Marcellus Shale formation. Will I owe any taxes on this money? Chuckle, Chuckle-Yes! Lease payments received for the right to drill are subject to ordinary income taxes. A reminder the higher the lease payment, the higher the tax bracket a landowner will be subject. As a general rule, you will need to set aside 35-45% of the payment for federal and state taxes. When the well is drilled, the owner will begin receiving royalty payments which will once again be subject to ordinary income taxes after depletion is taken. With potential for strong incomes from crop production this year, what are some strategies farmers can use to reduce their potential tax burden? Now is time for farmers to take a look at their records to examine potential income tax liability. Remember, that paying taxes is not a bad thing! By paying self-employment tax, the farmer is paying into social security which is the primary source of retirement income for many f...
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December 2011, Newsletters, Tax Management

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Nov

09

2011

2011 Agricultural Tax Issues Workshops

by: David Marrison, OSU Extension Educator Tax practitioners with an interest in farm income taxes will have an opportunity to attend a one day farm tax workshop scheduled for Monday, December 12, 2011 from 8:30 a.m. to 3:00 p.m. in nine locations across Ohio. This workshop will be taught by Dr. Phil Harris, Professor of Agricultural Economics, University of Wisconsin via tele-conference. This program has been designed for tax practitioners who have a significant number of farm clients and therefore need a substantial amount of information on agricultural tax issues. Participants will hear an audiotape of a live lecture given by Phil Harris, supplemented with a slide presentation Dr. Harris used during his lecture. Dr. Harris will be available for questions during two conference calls during the day, and OSU faculty will be in the meeting rooms to answer questions. Registrants will receive a valuable 236 page supplemental book. Some of the topics at these workshops include: self-employment tax and social security benefits, like-kind exchanges, farm income averaging, fertilizer or nutrient acquired with land, prepaid farm expenses, farm related income reported on Form 4797, taxation of agricultural labor, specialty agriculture taxation issues, and form 1099 requirements for farmers. The locations for the 2011 Agricultural Issues Workshops are: Caldwell, Ohio at the OSU Extension South Central Region Office Chillicothe, Ohio at the OSU Extension Ross County...
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December 2011, Tax Management, Upcoming Events

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Sep

23

2011

Beware of the Increasing Level of Deferred Income Tax

By: Dwight Raab, University of Illinois

Average (accrual) Net Farm Income for the five year period 2006 to 2010 was $$162,609. Net Farm Income for the five years prior (2001 to 2005) was $58,339. This makes for an increase of $104,270 in average net farm income between the two five-year periods. This should surprise no one and is evidence of higher yields in most of Illinois and increased commodity prices. To read more click here.

October 2011, Tax Management

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Sep

22

2011

2011 OSU Income Tax Schools to be held across Ohio this Fall

David Marrison, OSU Extension Educator OSU Extension and The Ohio State University’s Department of Agricultural, Environmental, and Development Economics Department are pleased to be offering the 48th Annual OSU Income Tax Schools at eight locations across Ohio in November and December. These two-day schools are designed for individuals who have some experience preparing and filing federal and state tax returns for individuals and small businesses. Instruction will focus on federal tax law changes and on the issues that tax preparers may encounter in 2011 preparing tax returns. The schools also will include an Ohio income tax update. Highly qualified instructors will explain and interpret tax regulations and recent changes in tax laws. The registration fee includes the workbook and other reference materials, instructor fees, meals, meeting rooms, and other expenses. Participants in the Tax Schools will receive the 2012 RIA Federal Tax Handbook and the 700 page National Income Tax Workbook (including a searchable CD containing the 2004-2011 workbook) prepared by the Land Grant University Tax Education Foundation especially for the income tax schools held in Ohio and 30 other states. The National Income Tax Workbook is available only as a part of the tax school registration. Continuing education credit for Accountants, Enrolled Agents, Attorneys, and Certified Financial Planners will be offered. The tax school locations are as follows: Dayton – November 8-9 ...
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October 2011, Tax Management, Upcoming Events

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Sep

10

2011

Tax Tips for Students and Parents Paying for College Expenses

Source-Internal Revenue Service Fall weather has arrived in Ohio meaning that thousands of young adults have returned to colleges across the state. As college costs continue to increase, the Internal Revenue Service is offering tips for students and parents as they pay tuition and other school related fees. The Internal Revenue Service reminds students or parents paying such expenses to keep receipts and to be aware of some tax benefits that can help offset college costs. Typically, these benefits apply to you, your spouse or a dependent for whom you claim an exemption on your tax return. 1. American Opportunity Credit This credit, originally created under the American Recovery and Reinvestment Act, has been extended for an additional two years – 2011 and 2012. The credit can be up to $2,500 per eligible student and is available for the first four years of post secondary education. Forty percent of this credit is refundable, which means that you may be able to receive up to $1,000, even if you owe no taxes. Qualified expenses include tuition and fees, course related books, supplies and equipment. The full credit is generally available to eligible taxpayers whose modified adjusted gross income is below $80,000 ($160,000 for married couples filing a joint return). 2. Lifetime Learning Credit In 2011, you may be able to claim a Lifetime Learning Credit of up to $2,000 for qualified education expenses paid for a student enrolled in eligible educational institut...
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September 2011, Tax Management

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Jun

26

2011

IRS Increases Mileage Rate to 55.5 Cents per Mile

WASHINGTON — The Internal Revenue Service today announced an increase in the optional standard mileage rates for the final six months of 2011. Taxpayers may use the optional standard rates to calculate the deductible costs of operating an automobile for business and other purposes. The rate will increase to 55.5 cents a mile for all business miles driven from July 1, 2011, through Dec. 31, 2011. This is an increase of 4.5 cents from the 51 cent rate in effect for the first six months of 2011, as set forth in Revenue Procedure 2010-51. In recognition of recent gasoline price increases, the IRS made this special adjustment for the final months of 2011. The IRS normally updates the mileage rates once a year in the fall for the next calendar year. "This year's increased gas prices are having a major impact on individual Americans. The IRS is adjusting the standard mileage rates to better reflect the recent increase in gas prices," said IRS Commissioner Doug Shulman. "We are taking this step so the reimbursement rate will be fair to taxpayers." While gasoline is a significant factor in the mileage figure, other items enter into the calculation of mileage rates, such as depreciation and insurance and other fixed and variable costs. The optional business standard mileage rate is used to compute the deductible costs of operating an automobile for business use in lieu of tracking actual costs. This rate is also used as a benchmark by the federal government and many bu...
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July 2011, Newsletters, Tax Management

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Apr

15

2011

Expansion of the 1099 Reporting Requirements Repealed by Congress

by: David Marrison, OSU Extension Educator Last May, the Ohio Ag Manager shared an article titled, The Impact of Section 9006 of the Patient Protection and Affordable Care Act on Agriculture (May, 2010) discussing the new 1099 reporting requirements in the Health Care Bill. At the time of the article, we promised to update subscribers of the Ohio Ag Manager, if a repeal happened. Thankfully for many agricultural businesses, President Obama signed into law the Comprehensive 1099 Taxpayer Protection and Repayment of Exchange Subsidy Overpayments Act of 2011 (H.R. 4) on April 14, 2011. This resolution repeals the expanded 1099 reporting provisions of the Patient Protection and Affordable Care Act (passed in March 2010) and Small Business Jobs Act (passed in September 2010). In March 2010, the Patient Protection and Affordable Care Act sought to expand the 1099 reporting requirements (beginning in 2012) to include all payments from businesses aggregating $600 or more in a calendar year to a single payee, including corporations (other than a payee that is a tax-exempt corporation) and to include payments made for property (was only for services not goods, previously). H.R. 4 signed by the President repeals this 1099 reporting expansion. Under the proposed rules, a 1099 would have to be issued by a farm business to any business or individual who the farm purchases tangible goods. For example, Farmer Jones purchases 25 tons of lime valued at $760 worth from XYZ Lime and Far...
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April 2011, Newsletters, Tax Management

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Dec

13

2010

Farmer’s Tax Guides Available at OSU County Extension Offices

by David Marrison, OSU Extension Educator

Do you need a resource to answer those tough farm tax questions? If so, farmers can receive a free copy of IRS Publication 22, the 2010 Farmers Tax Guide, at their local county OSU Extension office. The 2010 Farmer’s Tax Guide is an 89 page publication which explains how the federal tax laws apply to farming. This guide can be used as a guide for farmers to figure taxes and complete their farm tax return.

Some of the new topics for the 2010 tax year which are included in this publication are: standard mileage rate, increase in deduction for start-up costs, limitation on excess farm losses, increased section 179 expense deduction dollar limits, extension of special depreciation allowance, property eliminated from definition of listed property, decrease in personal casualty and theft loss limit, disaster losses, self-employed health insurance deduction, and wage limits for social security tax. More information can be found at the IRS website at:
http://www.irs.gov/publications/p225/index.html

The Rural Tax Education Site has an example Schedule F on their web site to help producers as they complete their Schedule F. The sample return can be found on web site at: http://ruraltax.org/
Click here to find the location of the OSU Extension County Extension offices

Click here to access a printable PDF version of the 2010 Farmer’s Tax Guide

January 2011, Newsletters, Tax Management

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Dec

09

2010

IRS Publishes 2011 Mileage Rates

by David L. Marrison, OSU Extension Educator

On December 3rd, the Internal Revenue Service issued the 2011 optional standard mileage rates used to calculate the deductible costs of operating an automobile for business, charitable, medical or moving purposes. Beginning on Jan. 1, 2011, the standard mileage rates for the use of a car (also vans, pickups or panel trucks) will be: 51 cents per mile for business miles driven (up from 50 cents per mile in 2010) 19 cents per mile driven for medical or moving purposes (up from 16.5 cents per mile in 2010) 14 cents per mile driven in service of charitable organizations (same as 2010) The standard mileage rate for business is based on an annual study of the fixed and variable costs of operating an automobile. The rate for medical and moving purposes is based on the variable costs as determined by the same study. Independent contractor Runzheimer International conducted the study. A taxpayer may not use the business standard mileage rate for a vehicle after using any depreciation method under the Modified Accelerated Cost Recovery System (MACRS) or after claiming a Section 179 deduction for that vehicle. In addition, the business standard mileage rate cannot be used for any vehicle used for hire or for more than four vehicles used simultaneously. Taxpayers always have the option of calculating the actual costs of using their vehicle rather than using the standard mileage rates. This blog article was written by using a press release provided by the Internal Re...
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December 2010, Tax Management

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Information presented above and where trade names are used, they are supplied with the understanding that no discrimination is intended and no endorsement by Ohio State University Extension is implied.

Ohio State University Extension embraces human diversity and is committed to ensuring that all research and related educational programs are available to clientele on a nondiscriminatory basis without regard to race, color, religion, sex, age, national origin, sexual orientation, gender identity or expression, disability, or veteran status. This statement is in accordance with United States Civil Rights Laws and the USDA.

Keith L. Smith, Ph.D., Associate Vice President for Agricultural Administration and Director, Ohio State University Extension TDD No. 800-589-8292 ( Ohio only) or 614-292-1868