Working Interest--Oil and Gas

[DaveinTexas]

I have a client that is pursuing a working interest in a oil/gas well, primarily to drill for natural gas.

He is the sole owner of a S Corp and he is wondering if it more beneficial to have the S Corp own the interest in the joint venture.

I know that if he buys into this well personally, he is treated as a general partner and all of the tax implications and legal implications have been explained to him.

My thought is: If his S Corp owns this interest, the share of ordinary income from the partnership would flow to his S Corp and ultimately to his 1040 as ordinary income, not subject to self employment tax.

Do you guys see any dangers in this thinking? I know I must be missing something.

TIA.

[Uncle Sam]

Working INterest-Oil and Gas

To my knowledge, a working interest in a natural resource is NOT subject to self employment tax. For an individual, it DOES get reported on Schedule C, but no SE tax.
For an S Corp to own the investment, you need to be concerned with the working interest not exceeding 25% of the total income of the corporation.
What was the shareholder attempting to accomplish by having the S Corp own the working interest?

[DaveinTexas]

General Partner

It was my understanding that income from a general partnership is subject to SE tax as well as ordinary income tax.

The Tax Reform Act of 1986 provides that a working interest in an oil and gas drilling program is not a passive activity. I think this income is active income and there should be no danger in violating that 25% of gross receipts rule.

Does anything I just said make any sense? Am I crazy?

And why is the sky blue?

[DaveinTexas]

Hep me buddies

I don't want this post to fall off to the second page; NO ONE LOOKS AT THE SECOND PAGE.

Does anyone have an answer to this quandry?

TIA