Investor benefits

Tax Advantages

There are many tax advantages available for investors who are sophisticated and wealthy enough to move beyond common asset classes, including these in oil and gas:

  • In the case of successful oil & gas investments, the IRS allows for tax write-offs from a person's taxable earned income of around 65%-80% of their investment amount in that year of the investment. The remaining amount depreciates over 7 years.
  • In an unsuccessful oil & gas investment, the IRS will allow just about 100% of the investment to be a write-off against the investor's taxable earned income, unlike stocks where the investor can only write off a small amount of the loss. This is subject to limitations.
  • A depletion allowance is where the IRS allows working interest income derived from the sale of oil and/or gas tax-free.
  • Passive income or the net income that is received every month from a producing oil or gas well. Each check serves to reduce the amount that was initially invested. This is very different from stocks, where most of the profitable income is made from the one-time sale of the stock.
  • Accredited Investors generally fall into the highest federal tax margins. Multiple oil & gas investment projects can significantly reduce the investor’s tax liability and provide long-term investment income.
Tangible & Intangible Drilling Costs

The federal tax code recognizes the concepts of capital formation and capital recovery,

encouraging investment in oil and natural gas production to decrease our dependency on

imports. Congressional incentives are designed to stimulate production funded by

private sources. These incentives allow you to legally deduct up to 60% - 80% of your

investment in the year you invest in intangible drilling costs. Up to 100% of

the remaining amount, categorized as tangible costs, is depreciated in just seven years.

Intangible drilling costs include expenses made by an operator incidental to and necessary in

the drilling and preparation of wells for production, such as survey work, seismic, ground

clearing, drainage, labor wages, fuel, repairs, supplies, etc.

Expenditures are intangible if they have no salvage value. On the other hand, tangible drilling costs are the

the direct cost of equipment used to prepare for and perform the drilling, such as drilling rigs,

tractors, trailers, tandem trucks, dozers, and excavators.

Immediate deductions of intangible drilling costs can be very large. An immediate upfront deduction reduces the investor’s federal and possibly state income tax as the risk capital is financed by the government.

Tangible drilling costs are about 20%-35% of the amount of the investment that is allotted to tangible drilling and completion costs and may be deducted over a 7-year time frame.