Tax Advantages

Merica Oil Company

Federal Tax Incentives

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:

Tangible Drilling Cost deduction: Tangible drilling costs are the actual direct costs of drilling equipment, such as rigs and machinery. When drilling a new well, about 30% of the drilling costs are tangible and are 100% tax-deductible but must be depreciated over 7 years.

Intangible Drilling Cost Deduction

Intangible Drilling Cost deduction: The other 70% of drilling costs are classified as intangible, which are expenses that cannot be recovered but are necessary for the drilling and preparation of wells for production. These costs include survey work, drainage, ground clearing, fuel, wages, repairs, hauling, and supplies; basically, everything except the actual drilling equipment and leases. Intangible drilling costs are 100% tax-deductible in the year incurred, as long as a well is operating by March 31 of the following year. Alternatively, Investors can amortize all or a portion of the costs over a 5-year time period. Intangible drilling costs are above-the-line deductions that reduce adjusted gross income and taxable income. Limited Partners can offset passive income with them.

Merica Oil Company
Merica Oil Company

Sample Tax benefit calculation

Amount Invested = 1 Unit in MCRF-I $160,000
Multiply Line 1 by 70% $112,000
Intangible Drilling Costs
Multiply Line 1 by 30% then divide by 7
$6,857/yr.
(TDCs* are depreciated over 7 years)
*Tangible Drilling Cost Deduction pursuant to IRS Sec. 179
Add Lines 2 & 3 - Total Tangible & Intangible
$118,857
Drilling Cost Tax Deductions
Enter your overall Tax Bracket*
*Include Federal, Medicare & State taxes (if any)
42.5%
Multiply Lines 4 & 5 $50,514
Subtract Line 6 from Line 1
Net Investment/1 Unit after Tax Deductions
$105,257
Merica Oil Company

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:

Tangible Drilling Cost deduction: Tangible drilling costs are the actual direct costs of drilling equipment, such as rigs and machinery. When drilling a new well, about 30% of the drilling costs are tangible and are 100% tax-deductible but must be depreciated over 7 years.

Intangible Drilling Cost deduction: The other 70% of drilling costs are classified as intangible, which are expenses that cannot be recovered but are necessary for the drilling and preparation of wells for production. These costs include survey work, drainage, ground clearing, fuel, wages, repairs, hauling, and supplies; basically, everything except the actual drilling equipment and leases. Intangible drilling costs are 100% tax-deductible in the year incurred, as long as a well is operating by March 31 of the following year. Alternatively, Investors can amortize all or a portion of the costs over a 5-year time period. Intangible drilling costs are above -the- line deductions that reduce adjusted gross income and taxable income. Limited Partners can offset passive income with them.

Depletion and Depreciation Allowance: As oil and gas are produced, a depletion allowance is allowed for the depletion of the asset, with a tax election (greater of cost or percentage depletion) for independent producers and royalty owners, the latter possible exceeding the capitalization cost of the well. The depreciation allowance for the exhaustion, wear and tear, and obsolescence. MCRF-I will maximize these allowances accordingly.