Why Invest in Oil and Gas?
Investments in Oil and Gas wells involves a high degree of risk, but may also result in high yield returns including additional investor tax benefits as follows – all of which should be reviewed with your tax advisor:
Deduction of Intangible Drilling Costs:
These include everything but the actual drilling equipment. Labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible costs. These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% deductible in the year incurred. Furthermore, it doesn’t matter whether the well actually produces or strikes oil or gas in the current year – as long as the well is placed in production by March 31 of the following year, the deductions will be allowed.
Deduction of Tangible Drilling Costs:
Tangible costs pertain to the actual direct cost of the well equipment. These expenses are also 100% deductible but must be depreciated over seven years.
Active vs. Passive Income:
The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with wellhead production and can be offset against other forms of income such as wages, interest and capital gains.
Small Producer Tax Exemptions:
This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. 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.
This includes the purchase of Oil and Gas Leases, mineral rights, lease operating costs and all administrative, legal and accounting expenses. These expenses are 100% deductible in the year they are incurred.
Alternative Minimum Tax:
All excess intangible drilling costs have been specifically exempted as a “preference item” on the alternative minimum tax return.
If you are interested in placement of private equity capital, oil and gas investments or joint venture opportunities we would be pleased to speak with you to discuss services we offer and participation options available to our investors