Tax Penalty on Lease Bonus

Just got out taxes back from CPA, I was surprised to find out that we had to pay a small penalty for not paying quarterly taxes on our lease bonus that we received in July 2008. We were not aware that we needed to pay quarterly. Just wondering if anyone else had this problem? Also, I am assuming that if you receive any lease bonus, that you may want to check with your CPA to see if you need to pay quarterly taxes on it before waiting until April 15, 2010 to pay.

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Permalink Reply by fullofgas on March 27, 2009 at 9:36am
Yes, when I did a test run on my taxes with one of those tax programs, it did put in a small amount like that but when I finally got my 10-99 form it was written up as royalties and not a lease bonus so the tax man said they did me a favor and saved me a little money. I was able to also take the 15% depletion since it was sent in to the government as royalties. Dont know, might be sorry later, but I checked with some of my neighbors and they were able to do the same thing. Now about this little penalty. I dont think thats right since no one knew at the beginning of the year, and most of the year, in fact, that we were getting any at all. So what is this, another loophole for the feds to get more taxes.
Permalink Reply by smith1 on March 27, 2009 at 10:09am
I agree, we have always paid taxes as due; and how were we to know that we had to pay quarterly last year for the lease bonus??? Oh well, just trying to let others that receive lease bonus this year, to contact their CPA or at least be aware of this!
Permalink Reply by P.G. on March 27, 2009 at 10:15am
Do you normally pay quarterly on other income?
Permalink Reply by smith1 on March 27, 2009 at 11:06am
No, never have, we are just a normal, everyday, honest, hardworking couple. So, how should we of known that?
Permalink Reply by P.G. on March 27, 2009 at 11:40am
I didn't know they'd hit one with a penalty the first year.
Permalink Reply by A. Banks on March 27, 2009 at 12:28pm
Yes, you have to pay taxes when income is earned. So if no taxes are withheld from an income amount (i.e. lease bonus pymt), IRS requires an estimated tax payment to be paid on that amount by the next estimated tax payment due date (Apr 15, June 15, Sept 15 and Jan 15) for income earned during the preceding time period. Normal salaries are taxed as they are earned so this is usually not an issue unless there are out of the ordinary incomes. Sad but true.
Permalink Reply by smith1 on March 27, 2009 at 1:03pm
Yep, that's what my CPA said, the penalty wasn't that much, but still, just not expecting it! Thanks for everyone sharing.
Permalink Reply by Kathy Morgan on March 27, 2009 at 2:39pm
The penalty was probably small because it was based on the difference in what you paid in for 2008 and what your tax was in 2007. At least that's what your CPA should have done on the penalty form. If your shale income is going to be big enough to make a difference this year you should sit down with your CPA and figure out some estimated payments for the fed and the state.
Now, what worries me is fullofgas saying he and some of his neighbors took the 15% depletion because the gas company reported the income on royalties instead of rents. This is not allowed. You can only claim depletion of income from actual gas/oil/minerals that are EXTRACTED, not on signing bonuses, no matter how they are reported. Trust me, the IRS will be looking over the returns from this area for just these types of things.
Please get with your neighbors and your CPA or tax person and get this corrected before the end of the season. Better to pay a little bit more now then get hit with an audit down the line and hit with penalties and interest as well. I have done lots of research into this and am absolutely positive the information is correct. I can send a link to the reference if anyone wants it.
Permalink Reply by smith1 on March 27, 2009 at 3:18pm
I just called my CPA again and he absolutely assured me that you CAN NOT put the original amount of the lease bonus as royalty or do any "depletion".....He said he could fax me something regarding this. Again, let me say that it was only a small penalty, but still..........how were we to know that we would have to pay quarterly on lease bonus? Of well, I am still blessed to have to pay the penalty, I guess. Thanks Again.
Permalink Reply by Kathy Morgan on March 27, 2009 at 7:41pm
The big thing here is that you have to know the difference between "cost basis" depletion and "percentage" depletion. As you can see by the example and definition above cost basis is virtually impossible to determine and keep up with since it changes every year. The other problem with doing cost basis depletion is over the long haul you eventually run out of basis and then you have no deduction in the following years. But since that is the case, the IRS is nice enough to let you use that if you get an "advance royalty" (i.e. bonus). But you absolutely CAN NOT use percentage depletion (the 15%) on a bonus.
Permalink Reply by Kathy Morgan on March 27, 2009 at 8:51pm
The "average Joe Landowner" could probably never determine an accurate cost basis, much less keep track of it over the years of depletion. Hell, this "outstandingly well trained and educated" Tax Professional like me has a really hard time doing cost basis. Thats why the IRS is kind enough to let us use it.
Whether or not the bonus is an actually signing bunus or "advanced royalities" is going to determine what the lease specifically says.
But my big contention here is that fullofgas and his neighbors took the 15% percentage depletion on their bonusus, This IS going to come back and bite them in the buttocks.
If by some mericale you can determine a good cost basis on a bonus payment, you then have to decrease the basis by the depletion taken every year, Well one year the ending number for cost basis is going to be 0$. When that happens you have no depletion at all to take forever more.
Once the well starts producing, you take the 15% depletion against the royalities as they are brought in every year. (Until the Omama budget stops it, that is)
Permalink Reply by smith1 on March 27, 2009 at 3:19pm
I would, please if not too much trouble.

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