Tax Benefits

Oil & gas investments in the United States come with many advantages over other types of investments. We always recommend you speak with you tax professional but here are some ways that you could benefit!

Save Money On Your Taxes With Texas Oil

The United States needs domestic oil and gas production, as opposed to importing it, for its own security and economic growth and sustainability. Congress has provided these incentives to stimulate and encourage petroleum development domestically. As a result, oil and gas drilling programs offer some of the most attractive tax benefits available to investors.

Intangible Drilling & Completion Cost (IDC)

In the process of drilling a well, there are certain expenses incurred that have no salvage value. They include everything but the actual drilling equipment. They may consist of labor, drilling expenses, testing, mud, grease, chemicals, etc. Basically the miscellaneous items necessary for drilling. These expenses generally represent anywhere from 65-80% of the total cost of the well. The investor’s proportionate share of these intangible expenses can be written off in the year in which they were incurred.

Active VS. Passive Income

The Tax Code specifically states that a Working Interest in an oil and gas well is not considered a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and, therefore, can be offset against your other forms of income such as wages, interest and capital gains.

Tangible Completion Expense

These are derived from the total amount of the investment allocated for equipment or other salvageable items. Typically, the amount represents 20-35% of the total cost of the well and are 100% deductible as a depreciation and may be taken over a seven year period (see Section 263 of the Tax Code).

Depletion Allowance

This may be considered one of the most enticing benefits afforded oil and gas investors. This incentive excludes 15% of all gross income from taxation on your oil and gas wells. In other words, 15% of the Gross Income from an oil and gas producing property is tax-free.

Example

$200,000 Investment

$100,000 can be deducted the first year as an IDC (Intangible Drilling Cost)

$40,000 can be deducted over the next 7 years as a tangible completion expense. For someone in the 37% tax bracket this would reduce your taxes by $51,800 (.37 x $140,000 = $51,800) which increases your ROI.