Oil And Gas Tax Deductions Explained

If you’re looking for the best return on your investments, its ideal if you seek out opportunities that allow you robust advantages on tax. If you’re looking for some ideal investment opportunities, we’d advise you to invest in oil and gas.


This is because the US government has intervened in the domestic production of natural gas and oil offering tax breaks for producers and investors both. In fact, the tax benefits on oil and gas are humungous and cannot be found anywhere else in the entire tax code.

If you invest in oil and gas you can be subjected to the following tax deduction options including but not limited to:

  1. Deductions on costs for tangible drilling:

Tangible costs for drilling might include the costs of drilling equipment used. Although the costs for such equipment depreciates over a period of seven years, the investors enjoy a complete 100% deduction on the costs.

  1. Intangible drilling costs tax deductions

All of your intangible drilling costs including the labor, are written off for the first year in which they are incurred; as long as you get the well operational by 31st of March the following year. This deduction is highly important for investors as intangible costs alone account for 60-80% of oil wells drillings. Intangible drilling costs can also include all expenses associated with labor, employees, supplies, chemicals, mud drilling, fracking processes and everything else other than the drilling equipment which is counted as a tangible cost.

The best thing about this investment and tax deductibles is the fact that tangible cost deductions completely cover the drilling equipment and intangible cost deductions provide coverage for almost all other costs making it possible to maintain a deductible on most of the cost of a well drilling. And this works even when the drilling does not produce any oil. The cost deductions have nothing to do with oil production or performance of the well.

  1. Cost deductions for lease

If you’re buying mineral or lease rights, you can get cost deductions as long as the expenses are written off through depletion allowance over the terms of the lease and capitalized upon. These cost deductions will also include all accounting costs, expenses for administration and other lease operating expenses that are related to acquiring the leasing and mineral rights.

  1. Income Deductions

According to the Tax Reform Act of 1986, losses for investors in oil and gas are deducted against business income, interest income, capital gains, salary or other active sources of income.

  1. Depletion allowances for small scale producers

As per this tax exemption you are allowed an exclusion from taxation on 15% of your gross income from gas and oil wells. If you receive $10,000 from your investment in oil and gas, $1,500 of the amount will be free of taxation. However to qualify for this tax exemption your well needs to produce less than 50,000 barrels in a day or you should own less than 1000 barrels of oil per day.

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