Economic Recovery Tax Act of 1981: its effect on negotiating oil lease bonus payments
The Economic Recovery Tax Act of 1981, with its declining individual income tax rates, has made it more attractive in many cases for both the lessor (landowner) and lessee (oil and gas company) to have bonus lease payments paid and received on the installment basis rather than as a lump-sum. While the reduction in the maximum individual tax rate from 70 percent to 50 percent reduces some of the advantages of installment reporting, many moderate income lessors should still be able to benefit by this strategy. Both the lessor and lessee can utilize equations (1) and (2) when negotiating oil lease bonus payments to maximize their after-tax returns. The equations are flexible enough to allow for analysis of delays rentals, advance royalties, and minimum royalties as well. Since the after-tax discount rate has a significant impact on the resulting present values obtained, caution should be used in determining both the lessor's and lessee's rates. If the lessor and lessee have different discount rates due to alternative investment opportunities, the relative benefits of the lump-sum versus installment strategy may change. (JMT)
- Research Organization:
- Texas AandM Univ.
- OSTI ID:
- 6182764
- Journal Information:
- Oil Gas Tax Q.; (United States), Journal Name: Oil Gas Tax Q.; (United States) Vol. 31:1; ISSN OGTQD
- Country of Publication:
- United States
- Language:
- English
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ECONOMIC IMPACT
ECONOMIC RECOVERY TAX ACT
FINANCIAL INCENTIVES
INCOME
INDUSTRY
INVESTMENT
LAWS
LEASES
NATURAL GAS INDUSTRY
PETROLEUM INDUSTRY
ROYALTIES
TAXES