The best advantage of oil and gas investing is a lower tax bill in a shorter amount of time.
You can legally deduct up to 80% of your investment in the year you make the investment—and up to 100% in just five years.
Intangible Drilling Cost Deduction
Intangible drilling costs are usually about 65-80% of the cost of a well. Intangible drilling costs are any costs that can’t be sold later, such as:
- Drilling rig rentals
- Drilling consultant fees
- Casing pipe
- Stimulating, fracking and acidizing processes
Intangible drilling costs (IDCs) are 100% tax deductible during the first year. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the tax code.)
Tangible Drilling Cost Deduction
Investment dollars allocated to the equipment (or any asset or expenditure you could sell later) are called tangible drilling costs (TDC). Examples include:
- Line heaters
- Leasehold interests
Tangible drilling costs make up the remaining 20% tax credit. They are 100% tax deductible. (See Section 263 of the tax code.)
The IRS also gives a 15% tax-free depletion allowance against production revenue. That’s to allow for the drop in oil and gas reserves in a well.
It’s similar to a depreciation expense for real estate, and this gives you continuing tax benefits for oil and gas investing after the first year.
Why Are Oil and Gas Tax Deductions Allowed?
Domestic energy production is a high national priority. Without enough affordable energy, our economic activity would literally grind to a halt.
Another reason for these generous tax deductions is the inherent risk involved in oil and gas investing. Because of traditionally high buy-ins, lack of transparency and risk, the federal government created tax incentives to invest in oil and gas.
(Our goal is to reduce that risk with carefully vetted oil and gas projects with proven operators, but all well investments have inherent risk because you don’t know for sure until you drill.)
An Example of Oil and Gas Tax Deductions
For instance, if an investor put $100,000 into an oil and gas project, he would get up to an 80% deduction on intangible drilling costs. In year one the tax deduction (reduction in taxable income) would be up to $80,000.
The investor also gets a 14.3% deduction on tangible drilling costs, which are any expenditure or asset that could be sold later. That adds a deduction of $2,860.
That comes to a total year one tax deduction of $82,860.
Standard tangible drilling costs are depreciated over seven years similar to standard depreciation rules, which is straight-line depreciation—the same amount each year over a number of years.
After the wells produce, you also receive a depletion allowance since they produce less each year.
For example, the EnergyFunders Jireh #1 project produced $86,158 in the first 12 months of production. $86,158 x 15% = $12,924 in additional tax reduction benefits.
You won’t find these tax advantages in stocks, real estate or any other investment.
How EnergyFunders Helps You Take Deductions for Oil and Gas Investing
Our projects allow you to take advantage of tangible and intangible drilling cost deductions and depletion allowances. You may also choose to be a limited partner or general partner, depending on your investment and tax goals.
Along with reducing your tax liability, you’ll help operators produce energy to keep the American economy rolling day after day – and reduce our dependence on foreign oil from nations that aren’t friendly towards the U.S. It’s an investment that you can feel good about and part of the legacy that you’ll leave for future generations, and you just can’t put a price tag on that. Create a free account to view our vetted investments and start making a difference with oil and gas investing today.