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Tax Benefit

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Oil & Gas Investing Tax Benefits

 

Oil and gas investing can provide significant tax benefits.

It would be safe to assume that perhaps no other industry offers more tax incentives than oil and gas investing.  Here is a partial list of some of the possible advantages.

Obviously, consulting with your tax advisor pertaining to how these affect your situation is always important before you claim these benefits.

Intangible Drilling Costs:  Think of this as everything on the drilling site except the equipment itself.  This could include the crew, the fracking process and all associated equipment, employees, etc.  Drilling mud, and other items that are necessary for drilling.  These expenses can amount to up to 80-percent of the cost of drilling a well and you can deduct 100% of your portion of the intangible drilling costs in the year they are incurred.
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Tangible Costs:  These are the remaining costs and can be written off at 100-percent over seven years.

Lease Costs:  The cost of acquiring the mineral rights, including all administrative and legal expenses, is deductible at 100-percent in the year the expenses are incurred.

Depletion Allowance:  This is the most exciting incentive for many investors because the tax code allows for the depletion of the asset.  Therefore, 15-percent of all gross income from oil and gas revenue is excluded from taxation.

Active Income:  Working Interest is not considered a passive activity for tax purposes.  This means that any net losses are active income and can be used to offset other forms of income such as capital gains, interest income and even wages.

Alternative Minimum Tax:  All excess intangible drilling costs have been specifically exempted as a “preference item” on the alternative minimum tax return.

Alternative Minimum Tax (AMT)

In the 1990s, Congress provided relief for those investing in crude oil and gas through their definition of “independent producers”, which are oil and gas companies or individuals with production of less than 1,000 barrels a day.  Previously, oil and gas investments could be subject to the Alternative Minimum Tax (AMT), and although this is still possible, with the revisions two decades ago, well depletion is no longer considered a preference item.

Lease Operating Expense

The day-to-day costs of operating a well are covered under the Lease Operating Expense.  This could also include re-entering the well or re-working an existing well.  Lease operating expenses should generally be deducted fully in the year they are incurred, without being subject to AMT.

Conclusion

It has long been established that tax benefits from direct participation in oil and gas investments are substantial.  For one, the ability to deduct the intangible drilling costs fully in the year they are incurred can provide substantial tax savings.  This single benefit diversifies risk, subsidized by the government in the form of lower federal, and in some cases, state taxes.

As with all tax issues related to investing in oil and gas, always consult your tax advisor.