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Ohio Utica Shale

Drilling lease bonuses will impact 2013 taxes for Ohioans

By Bob Downing Published: December 17, 2012

From the Youngstown Vindicator:


YOUNGSTOWN, Ohio — Those who received bonus payments from oil and gas leases in 2012 may have a little extra tax to pay on their 2013 state returns.

Individuals or couples earning more than $150,000 per year are subject to filing under the state’s Commercial Activity Tax, said Benjamin DiGirolamo, supervisor at Hill, Barth and King LLC, a Youngstown-based accounting firm.

Those who earned between $150,000 and $1 million will pay a flat rate of $150 in commercial activity tax to the state. Earnings of more than $1 million are taxed at .26 percent.

’The majority of those who have to pay the CAT tax will have to pay $150,’ DiGirolamo said.

It’s important that people realize if they received a bonus payment, they will have to register with the state for the commercial activity tax, and then cancel that

account if royalty payments are not made for a couple of years or if their taxable income, even with royalties, falls below $150,000, he said. Once royalty payments begin, they may have to register again.

The state decided that by signing a lease with an oil and gas company, an individual has become part of the oil and gas business for tax purposes, DiGirolamo said.

Those who signed leases also may want to look at real-property-tax implications. Oil and gas are considered by the state to be real property, said Stan Dixon, deputy tax commissioner for the Ohio Department of Taxation.

’A complicated formula creates a tax factor for oil and gas. This tax factor is used in calculating a value of the remaining reserve,’ he said.

Oil and gas value is taxed the same way as any type of real property, Dixon said. If mineral rights were deeded to the oil company, they will receive the tax bill, but if rights were leased, the lease agreement will state who is responsible for paying the tax.

There are other issues that those who received bonus or royalty payments should


The bonus payments come with no standard deduction and must be paid as income tax, said George Millich, a tax attorney for Harrington, Hoppe & Mitchell LTD, a Youngstown-based law firm.

’Those who receive royalties can get a 15 percent depletion deduction, and that comes right off the top,’ DiGirolamo said.

There is no depletion deduction available for bonus payments, Millich said.

Bonus recipients are not likely to, but could have to make prepayments to both federal and state taxing agencies, he said. Individuals need to check to make sure their income did not increase so much they have to prepay taxes to the state and federal government.

’Although it is unlikely, based on prior income requirements, that most of those who received lease bonuses would have to file,’ DiGirolamo said. Prepayments are more likely to become necessary when people begin receiving bonus payments.

Capital gains taxes also are unlikely to be an issue for those who signed oil and gas leases because there is no transfer of property, Millich said. Capital-gains taxes are not going to occur for any property owner who maintains a royalty interest, DiGirolamo said.

Each situation is different based upon that individual’s total economic profile. Landowners can use losses in other businesses to offset financial gains from lease bonuses or royalties, said Del Harlan, executive administrator of personal and school district income tax division of the state deparment of taxation.

More information about the state’s commercial activity tax is available at—activities.aspx.



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Utica and Marcellus shale web sites

Ohio Department of Natural Resources' Division of Oil and Gas Resources Management State agency Web site.

ODNR Division of Oil and Gas Resources Management. State drilling permits. List is updated weekly.

ODNR Division of Geological Survey.

Ohio Environmental Protection Agency.

Ohio State University Extension.

Ohio Farm Bureau.

Ohio Oil and Gas Association, a Granville-based group that represents 1,500 Ohio energy-related companies.

Ohio Oil & Gas Energy Education Program.

Energy In Depth, a trade group.

Marcellus and Utica Shale Resource Center by Ohio law firm Bricker & Eckler.

Utica Shale, a compilation of Utica shale activities.

Landman Report Card, a site that looks at companies involved in gas and oil leases.FracFocus, a compilation of chemicals used in fracking individual wells as reported voluntarily by some drillers.

Chesapeake Energy Corp,the Oklahoma-based firm is the No. 1 driller in Ohio.

Rig Count Interactive Map by Baker Hughes, an energy services company.

Shale Sheet Fracking, a Youngstown Vindicator blog.

National Geographic's The Great Shale Rush.

The Ohio Environmental Council, a statewide eco-group based in Columbus.

Buckeye Forest Council.

Earthjustice, a national eco-group.

Stop Fracking Ohio.

People's Oil and Gas Collaborative-Ohio, a grass-roots group in Northeast Ohio.

Concerned Citizens of Medina County, a grass-roots group.

No Frack Ohio, a Columbus-based grass-roots group.

Fracking: Gas Drilling's Environmental Threat by ProPublica, an online journalism site.

Penn State Marcellus Center.

Pipeline, blog from Pittsburgh Post-Gazette on Marcellus shale drilling.

Allegheny Front, environmental public radio for Western Pennsylvania.