Oil Industry Tax Breaks

Top Three Tax Deductions for Oil and Gas Investments

Top Three Tax Deductions for Oil and Gas Investments

Since 1986, Uncle Sam has given you two options: hand him your tax dollars or instead invest in an oil and gas project. Here are the top ways your tax bill can benefit from tax deductions for oil and gas investments.

Intangible Drilling Cost Tax Deduction

The intangible expenditures of drilling (labor, chemicals, mud, etc.) are usually about (65-80%) of the cost of a well. These expenditures are considered intangible drilling costs (IDC), which are 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. 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

The total amount of the investment allocated to the equipment tangible drilling costs (TDC) is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (See Section 263 of the tax code.).

Depletion Allowance

A benefit implemented to help support smaller oil companies and direct investors, the 1990 Tax Act allows certain entities to exempt 15 percent of their gross income from federal taxes. This exemption applies only to companies that produce no more than 50,000 barrels per day of oil or other entities that produce no more than 1,000 barrels of oil per day or 6 million cubic feet per day of gas.

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