Does anyone know if the pay items in the surface use agreement, i.e. $15,000 per well drilled, is taxable income? I have heard that it is considered liquidated damages and not taxed by the federal government. Thanks!
Dear Mr/Ms Cole,
This is truly a CPA question that depends on how aggressive you and your accountant are on claiming deductions. A certain percentage would easily be claimed as damage, which you would not claim as income, but a reduction in the basis of the property. The Feds will generally not get too upset at 33% claim for damage. I have seen 42% not challenged. It is best for the payment to be in two checks -- one for rentals, one for damage.
So, the answer is - do not listen to me or anybody other than your accountant. Do mention to him the reduction in basis option.