When it comes to managing the income from your lease, knowing how and when you want to receive your payments is important in the protection of your assets.. One way to receive your funds is through Bonus Payments.
What are Bonus Payments? A Bonus Payment is the amount paid to the landowner for the execution of a lease by the gas company. Typically, this is in one large payment, but it can (and often should) be two or more payments.
Timing is important. Be aware of the “Recognition of Income Rule.” Lease payments are taxable in the year they are payable under the terms of the lease, regardless of when they are actually paid. Consider spreading out bonus payments over two or more years to take advantage of graduated federal income tax brackets. Even then, the bonus payment can be entirely taxable in year one without very careful planning. Northwest Savings Bank can help you plan this step carefully and cautiously so you can avoid these high taxes and get the most out of your lease income.
What to watch for. Bonus Payments are usually made upon signing the lease. When and how payments should be made may depend upon your personal tax situation, the time of year, and the drilling company’s production timeline. There may be tax advantages in splitting up the payment of bonus money over two or more tax years.
If the lease proposes a Bonus Payment via “draft,” be aware that this is not a check and may not be funded by the oil or gas company. If it is not funded, the have effectively unilaterally cancelled your lease and you will not receive the contemplated Bonus Payment or other economic benefits of your lease.
Remember, planning is very essential to your financial security! Contact one of our local, no cost advisors today so you can get the most of your oil and gas royalties!