Tax Incentives
Oil and Gas Tax Incentives
The successful production of domestic oil and gas means our country is safer, our economy is stronger, and we keep more Americans working.
As a result, the federal government offers very attractive oil and gas tax incentives for investments in domestic oil and gas development. There are three primary incentives:
Intangible Drilling Costs
Participation in a Reserve Oil & Gas, Inc. drilling program allows partners to deduct most of their investment through Intangible Drilling Costs (IDC) in the same tax year and can be offset against active or ordinary income. Working Interest Investors receive one dollar of tax deduction for every dollar of IDC invested. IDCs can make up roughly 85% of the total investment. For example, an investment of $100,000 made in Reserve’s drilling program could yield up to $85,000 in tax deductions for the year the investment is made. The IDC deduction reduces the investor’s Adjusted Gross Income and can lower their Alternative Minimum Tax as well.
Tangible Drilling Costs
Tangible Drilling Costs take into consideration the expenses and hard cost needed to drill wells such as wellheads, pipes and storage tanks. These costs account for approximately 20% of the total investment and may generally be depreciated over seven years.
Percentage Depletion Deductions
The Percentage Depletion Allowance, also know as “Small Producers Exemption”. This incentive allows for 15% of the gross income from an oil and gas producing property to be tax free. By way of example, if partners are getting a monthly revenue check of $10,000 then $1,500 is tax free.
Hypothetical Example
Without Tax Deductions
| Estimated Taxable Income: | $500,000 |
| Federal Marginal Tax Rate: | 28.5% |
| WV Marginal Tax Rate: | 6.5% |
| Total Taxes: | $175,000 |
| (Tax is based on married filing jointly) |
Reserve Drilling Program With Tax Deduction
| Estimated Taxable Income: | $500,000 |
| Subtract IDC cost of investment: | $80,000 |
| Subtract first year estimated depreciation: | $20,000 |
| (Assumes Section 179 deduction election) | |
| Adjusted Gross Income: | $400,000 |
| Revised Federal Marginal Tax Rate: | 28.5% |
| WV Marginal Tax Bracket: | 6.5% |
| Total Taxes: | $140,000 |
| Tax Savings: | $35,000 |
| Drilling Program Investment: | $100,000 |
| Subtract IRS Savings: | $35,000 |
| True At-Risk Capital: | $65,000 |
This example is not intended to give tax advice. Please consult your personal tax advisor for your unique tax situation.