7 Tax Tips for Oil and Gas Landmen
For individuals that become landmen, this is usually the first time they would be considered self-employed, so they are not aware of all the tax consequences of being self-employed nor do they realize what can be legally deducted from income on their tax returns.
How To Reduce The Amount of Tax You Have to Pay
as an Oil & Gas Landman
During my time at KPMG and then Devon Energy I really enjoyed working on tax and accounting issues. When I started Petroleum Accounting Consultants, PLLC in late 2001 my practice revolved around working with oil and gas operators. In 2002 when I started Sean M. Hugo, CPA, PC we started working with many oil and gas service companies and oil and gas landmen.
Here are seven tax tips for oil and gas landmen that will reduce the amount of tax they are required to pay.
Tax Strategy #1: Deduct Employer Meals at 100%
The general rule is meals are 50% deductible. However, there is a provision that if the meals are for the convenience of the employer, then meals are 100% deductible. In other words: if by providing the meal the employee (or in this case the landman) is able to continue to work, the meal is 100% deductible.
Tax Strategy #2: Delay Your Income
Most landmen are cash-basis taxpayers, so they can benefit from controlling the cash in-flows and cash out-flows. As the end of the year approaches, don't bill for your services until the last few days of the year, so you will not receive the check until after December 31st. There is an IRS rule called constructive receipts which basically states that if you have right to the income, you must pick it up in the year in which you were entitled to the income.
For example: Say there is a check in your mailbox on December 28, but you refuse to check the mail for a week and decide to not check it until January - it doesn't mean you can delay picking up the income. However, if the check is written and sent in January than it counts for the next year.
Tax Strategy #3: Pay Bills Before The Year End
Assuming you're on a cash basis, then be sure to pay any outstanding accounts payable bills you have received by December 31st. There is no reason to wait and pay a bill in January when you could have paid it in December - this just delays when you can get the deduction for the expense.
Tax Strategy #4: Deduct Travel Correctly
Travel is one of the largest expenses of being in business as a landman. Did you know that how your job assignment is classified will determine if those expenses are deductible? If the job assignment is a year or longer it is considered permanent and you have a different "tax home", meaning your travel expenses are not deductible. However, if your job assignment is considered temporary (meqning it lasts a year or less), then you can deduct your travel expenses. This can make a huge difference in the amount of tax you pay.
Tax Strategy #5: Open an SEP IRA
If you are self-employed and don't have any employees working for you, then you should consider opening up a Sep IRA. This will allow you to contribute up to 25% of your profit into the SEP IRA, which will significantly reduce the amount of income tax you have to pay.
Tax Strategy #6: Deduct Your Home Office
Don't forget your home office expenses. The IRS has very specific rules about what qualifies as a home office, but if you meet those qualifications this can reduce your taxes.
Tax Strategy #7: Set up an LLC or an S-Corp
We have saved the largest tax break for the last. If you set up an LLC and elect S-Corp status for tax purposes, you can dramatically reduce the amount of self-employment tax you will pay. Most new landmen don't realize they have to pay self-employment tax. Self-employment tax is social security and Medicare tax: when you are an employee, half of the tax is withheld from your paycheck and then your employer pays the other half. When you are self-employed you pay all 15.3% of the tax on top of your income tax. The IRS is not naive to this tactic so this is one of the areas where the pigs get fat and the hogs get slaughtered.
Professional Tax Preparation Services for Oil & Gas Companies
Despite what your Uncle Vinny says, there is not one magic way to reduce your taxes. That said, there are a lot of little things that can reduce the amount of tax you pay. I have had countless people in my office telling me about their buddy who doesn't pay any tax because they spend all the profits in their business so they basically break even and don't owe any tax.
What a lot of new business owners don't understand is that when you spend a dollar you don't reduce your taxes by a dollar you only reduce your taxes by your marginal tax rate - say 25%. In my opinion it makes no sense to spend a dollar to save 25 cents of tax.
The reality is the people that don't pay any tax don't have any money in the bank. If you pay $50k in tax there should be another $150k in the bank. I will trade $50k in tax to have $150k in the bank any day of the week.