Home -- Investment Tax Benefits

Disclaimer
The following general discussions are provided for background information only. This information is not intended to be individual advice. Participants should consult with their personal tax advisor concerning the applicability and their effect on the personal tax situation. Tax laws change from time to time and there can be no guarantee of the interpretation of the tax law.

Tax Advantages
The U.S. Internal Revenue Code provides specific and detailed information relating to oil and gas investments. The following highlights the inherent tax advantages in general. However, each investor should understand that this information is not necessarily comprehensive and that investors should consult with a knowledgeable tax professional for details on risk and benefits of investing in oil and gas.

Tax Advantages of Oil and Gas Drilling

Congressional Incentives
Natural gas and oil development from domestic reserves helps make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Natural gas and oil drilling projects offer many tax advantages. These tax benefits enhance the economics.

Intangible Drilling Costs Tax Deduction
Oil and gas projects are labor intensive, so a significant portion of the expenditure is considered Intangible Drilling Costs (IDC), which could be 100% deductible during the first year. For example, a participation of $100,000 could result in approximately $65,000 in tax deductions for IDC even if the well does not start drilling until March 31st of the year following the contribution of capital. The remaining $35,000 of tangible costs may be deducted as depreciation over a seven-year period. (See section 263 of the Tax Code)

Active vs. Passive Income
The Tax reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active business. The new Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" activity; therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code).

Alternative Minimum Tax
Prior to the 1992 Tax Act, working interest participants in oil and gas joint ventures were subject to the Alternative Minimum Tax to the extent that this tax exceeded their regular tax. The recent Tax Act exempted Intangible Drilling Cost as a tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preferences items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage ad the well thereon.

TAX EXAMPLE
A participant’s potential tax benefits:
Each participant’s tax liabilities are different; consult with your personal tax advisor regarding the potential benefits of oil and gas investments. The below example assumes an individual in a 35% tax bracket.

Initial Investment                        $100,000
Intangible Drilling Costs deduction 80%:    80,000
Tax Savings 35% Taxpayer:                   28,000
Net Investment:                           $ 72,000 

Expenses will be deductible from the income derived from the sale of oil and gas.