WHEELING - Those signing natural gas drilling deals with terms such as $4,000 per acre and 18 percent on production royalties have the potential to receive a financial windfall.
But property owners need to understand that the federal and state governments will be lining up to get their portion of that funding, local wealth managers and lawyers note. Those gaining money from gas companies will need to pay both federal and state income tax on their payments - and they may suddenly find themselves in a higher tax bracket.
"You don't want to spend all of your money on Corvettes, and then have the federal government come to repossess them," said Paul McKay, senior trust officer for WesBanco Inc. "It's fine to buy those types of items, but you need to make sure they fit into your overall investment plan."
As natural gas abstractors search through property records across the Ohio Valley, landowners are looking for ways to retain as much of their lease and royalty money as possible.
Photo by Casey Junkins
If you earn about $25,000 per year from your job and get a bonus check for $10,000, this could significantly increase your tax burden in a given year. However, if you earn $100,000 per year and receive a gas check for $250,000, your income taxes for that particular year will increase by an even higher percentage, he said.
"There are some people who, essentially, look at this as free money," said McKay. "I generally advise people to set aside about one-third of the money, just to make sure you have enough to cover the taxes."
Jeff Yourkovich, owner of accounting firm Yourkovich and Associates in Elm Grove, said the fees paid to a professional tax planner will be far less than the savings one will experience with their tax burden.
Q: You've just received a windfall from your mineral rights. How should you plan to take care of your money?
A: First, deposit the money and let it work for you by earning interest. Then, plan for your tax burden by working with an accountant. It's also a good idea to hire a financial adviser to assist in your long-term planning.
He also recommends local residents who know they will be receiving a financial windfall to start planning for the money before it actually arrives.
"If you know you are going to get a significant amount of money in a month or two, it doesn't hurt to start planning now," he said. "You should see a professional tax planner who can examine your overall tax situation to provide some paths to save money through a retirement plan, deductions you may be eligible for ... it will allow you to get an idea of what it will actually cost in federal, state and even local taxes."
Yourkovich also said "when you get a financial windfall, people will want you to spend your money on legal, financial and accounting advice and planning. Make sure those people have the correct qualifications before you agree to work with them."
McKay noted the first thing one should do upon receiving a lease check is deposit it.
"You need to get that money into a bank account so that it can start to work for you, instead of it just sitting there," he said. "Even if you have different plans later on, you could put the money into a position to let it earn interest for you, as opposed to just allowing it to stagnate."
Local lease contracts have reached at least as much as $5,200 per acre, with production royalties of up to 19 percent. McKay said "the royalty is far more valuable" than the lease payment, noting the amount a mineral owner can collect once drilling begins will total more money over time than will the lease payment.
"You need to pay estimated taxes quarterly to avoid penalties from the government," said McKay, noting this applies to both the initial lease payment and to the subsequent royalty payments.
"Once you start receiving royalties, you should be paying taxes quarterly," he added.
Estimated tax forms and instructions are also available from the Internal Revenue Service, the Ohio Department of Taxation and the West Virginia State Tax Department.
Although he said it is fine for landowners to have fun with some of the money they receive, McKay said it is also good to set up a trust fund or establish a college fund for your loved ones. Paying off debt is also a good use of the money.
"There are times when these issues will cause disputes within families," McKay said of the monetary amounts that can reach into the hundreds of thousands of dollars, if not millions of dollars. "It really is not something worth tearing up your family over, though."