Tax Benefits

When it comes to tax-advantaged investments for wealthy and sophisticated investors, one investment class continues to stand above all others, OIL.

To encourage the development of domestic oil and gas production, The U.S. Tax Code provides numerous tax incentives. Most notably, investors can write off up 85% of their investment in the first year.  Restrictions may apply.

Tax Benefits include:

Intangible Drilling Costs:

These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% deductible in the year incurred.

IDC’s include everything but the actual drilling equipment. Labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. For example, if it costs $300,000 to drill a well, and if it was determined that 75% of that cost would be considered intangible, the investor would receive a current deduction of $225,000.

Tangible Drilling Costs:

These expenses are also 100% deductible but must be depreciated over seven years.

TDC’s pertain to the actual direct cost of the drilling equipment. Therefore, in the example above, the remaining $75,000 could be written off according to a seven-year schedule.

Small Producer Tax Exemptions:

15% of all gross income from oil and gas wells is excluded from Taxation.

This incentive is commonly known as the “depletion allowance.” This is perhaps the most enticing tax break for small producers and investors. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.

Lease Costs:

These expenses are 100% deductible in the year they are incurred.

These include the purchase of lease and mineral rights, lease operating costs and all administrative, legal and accounting expenses.

As the example below shows, a $100,000 investment in oil could provide more than $20,000 in net tax savings the first year you invest.

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