Oil and Gas Tax Benefits
For Investors and Small Businesses
There are several investments that offer tax advantages for sophisticated investors. One that stands out among all of the investments is oil and gas. With the U.S. government’s backing, producing oil and natural gas in the United States comes with tax incentives for investors and oil and gas companies like JB London.
Intangible Drilling Costs (IDCs): include everything not reusable during the drilling process. Basically it’s everything but the drilling equipment. This includes labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses represent the largest tax deduction and generally constitute 70% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if it costs $500,000 to drill a well, and if it was determined that 70% of that cost is considered intangible, the investor would receive a current deduction of $350,000. The investment can be written off in the year the wells are operating regardless if they strike oil.
Tangible Drilling Costs: are opposite of IDC’s and include anything that is reusable such as the direct cost of drilling equipment. These expenses are also 100% deductible but must be depreciated over seven years. Therefore, in the example above, the remaining $150,000 could be written off during these seven years.
Depletions Allowance: accounts for the reduction of reserves (oil production) as a product is produced or sold–up to 20% of the net income received from oil and gas wells. According to the current tax code, this special benefit is limited to small oil and gas companies that produces more than 50,000 barrels of oil per day and investors.
Active vs. Passive Income: working interest is not considered to be a passive activity. All net losses are active income incurred in conjunction with production and can be offset against other forms of income such as wages, interest and capital gains.
Tax Advantage Example: $100,000 X 70%IDC X 35%Tax Bracket = $24,500 Dollar Tax Savings (24.5% return of the investment just from tax benefits)
There are significant risks associated with investing in oil and gas ventures. The above information is for general purposes only and is not a solicitation to buy or an offer to sell any securities. Tax laws are constantly changing. General information on this site is not intended to be used as individual investment or tax advice. Consult your personal tax