This form is used when Assignor grants, assigns, and conveys to Assignee a percentage of the net profit interest in the Working Interest. The Net Profits Interest is the stated percentage interest in the share of monies payable for gross production attributable to the Working Interest less the costs and expenses attributable to the Working Interest.
Kentucky Assignment of Net Profits Interest
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US-OG-303
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How to fill out Assignment Of Net Profits Interest?
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A net profits interest is an agreement that provides a payout of an operation's net profits to the parties of the agreement. It is a non-operating interest that may be created when the owner of a property, typically an oil and gas property, leases it out to another party for development and production.
From an accounting perspective, profits interest is generally accounted for under Financial Accounting Standards Board (FASB) Accounting Standards Codification (ASC) 718 Stock Compensation or FASB ASC 710 Compensation.
As background, Revenue Procedure 93-27 provides that a person's receipt of a profits interest in exchange for the provision of services to or for the benefit of a partnership in a partner capacity (or in anticipation of being a partner), is not a taxable event for the partner or the partnership.
A capital interest is a type of equity commonly issued by LLCs, under which the member of the LLC contributes capital to the LLC and has an ownership interest. Unlike a capital interest, profits interests do not represent ownership in the LLC.
A profits interest represents an actual interest in the ownership of a partnership. As such, it differs from a stock option (another form of awarding an ownership stake), which grants to the holder a right to buy into a company at a time in the future.
It is important to note that if an employee receives a profits interest, he or she can no longer be an "employee" of the partnership for tax purposes ? the IRS position is that one cannot be both a partner and an employee of the same partnership.
Properly designed, profits interests convey an ownership share of future profits and equity upside without a capital stake in the past. This powerful incentive plan requires no buy-in; is not taxable at grant or vesting; and, its capital liquidations are taxed as capital gains.
A profits interest serves as an incentive for partners to become more proactive in pursuing greater profitability, thus contributing to the companies' growth. It also provides a tax benefit to recipients, as all appreciation in value is taxed as long-term capital gains rather than as ordinary income.