5 Tax Tips for Oil and Gas Landmen

Posted by CourthouseDirect.com Team - 03 March, 2014


tax tips for landmenOil and gas landmen often work long, irregular hours to fulfill their duties. While this sub-field generally compensates experienced workers well, there are plenty of drawbacks to it as well. For starters, oil and gas landmen must deal with a variety of tax issues that workers in other fields simply don't have to consider. Learn more about how the IRS expects landmen to complete their taxes and what steps said workers can take to reduce or mitigate their tax burdens.

How Does the IRS Regard Landmen?

With regards to the employee status of oil and gas landmen, there is some tension between the IRS and this community of workers. Historically, landmen have been regarded as independent contractors who maintain business relationships with multiple drillers, landowners and energy firms. Over the past decade, however, consolidation in the exploration business and practical considerations on the part of landmen has led many professionals to reserve the bulk of their services for one or two individual oil and gas businesses. This shift has encouraged the IRS to audit "exclusive" landmen at higher rates and subject their generous business deductions to stricter scrutiny.

Determining Employee Status

Under the IRS's current legal framework, landmen who perform exclusive work for a single oil and gas firm over long periods of time are considered employees of said firm by default. Landmen who wish to challenge this status must be able to prove that they contract with multiple partners, are under no obligation to follow specific directives, have the ability to delegate their work and are not required to perform their work at a specific location. Certain other considerations may come into play as well. 

Although employee status confers plenty of benefits, many oil and gas firms won't work with landmen who have been deemed to be full-time employees by the IRS. Moreover, independent contractor status allows landmen to claim certain deductions and credits that aren't available to regular employees.

Common Methods for Reporting Income and Expenses

Since landmen who operate as independent contractors preside over a small but functional business enterprise, it's crucial that they understand how to report and frame their profits, losses and expenses. Some common methods for reporting income and expenses include:
  • Completed contract: Income must be reported for the tax year in which a long-term contract is completed or terminated.
  • Exempt percentage completion: Income is reported on a "rolling" basis via a calculation that multiples the total value of the contract by an accurately determined "completion percentage."
  • Accrual method: Income is reported in real time through point-of-payment logging of income, expenses and administrative costs.

Important Business Tax Deductions

Landmen who work as independent contractors can take advantage of a complex but generous framework of deductions and credits. Some of the most popular include:

  • A home-office deduction that allows landmen who work out of a residential office to deduct a portion of their rent or mortgage payments
  • A travel expense deduction that applies to landmen who work on short-term projects
  • Deductions for meals and incidental expenses that arise in the course of a project

Several other deductions may apply to landmen in specific circumstances. It's best to check with a tax professional to determine eligibility.

Additional Tips and Considerations

Although independent contractor status provides landmen with business tax deductions that aren't available to regular employees, contractors are responsible for paying their own FICA taxes. These Social Security and Medicare payments can add 15 percent or more to a typical landman's tax burden. Landmen who wish to avoid this should consider forming tax-favorable business entities like LLCs or S-Corporations.

* Image courtesy of freedigitalphotos.net

Topics: Finance

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