Tax Benefits

Congress has provided attractive tax incentives to both encourage and increase domestic oil and gas production. As a result, oil and gas ventures are now one of the most tax-advantaged investments available. Specifically, these federal tax subsidies allow investors involved in exploration and production of oil and natural gas wells to write off the majority of their costs immediately. Following is an overview of a few of the tax advantages related to oil and gas investments.

Exploration and Development Costs. Oil & Gas investors can write off their “intangible drilling costs” or “IDCs” during the first year of the investment. Typically, IDCs represent 70% to 90% of the total investment, creating a tax-sheltering effect. Additionally, IDC costs are deductible in the current tax year even if the well drilling has not started until March 31 of the year following the investment.

For example, on a $28,000 Oil and Gas investment, the potential tax savings would be:

TAX SAVINGS

Based on a $22,400 IDC Deduction or 80% of Total Investment
Tax Rate Tax Savings
27.0% $6,048
30.0% $6,720
35.0% $7,840
38.6% $8,646

Tangible Drilling Costs. The remaining 10% to 30% of oil and gas investments include tangible drilling costs which are not fully deductible in the current tax year, but may be depreciated over a five to seven-year period.

Percentage Depletion Allowance. The 1990 Tax Act provides special tax advantages for the typical investor in oil and gas drilling projects. Currently, the Percentage Depletion Allowance treats 100% of an investor’s first 15% of oil and gas income as tax-free.

Potential tax advantages will vary based on each individual’s tax situation. Consult your tax advisor for additional information.