Cannon Operating-Tax Incentives

Investing in oil and gas wells can provide unique tax incentives.

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Intangible Drilling Costs

IDCs refer to unquantifiable expenses, such as labor, fuel, grease, chemicals, mud, and so on, required for a drilling project. In other words, they include intangible expenses (incurred by an operator) except for expenditures on the actual drilling machinery, tools and equipment. Almost 65 to 80 percent of a project’s cumulative cost is deducted (in the current year) as IDCs. If the cumulative cost of a project, for example, amounts to $300,000 and 75 percent of that amount is spent on IDCs, then investorscan expect a $225,000 tax deduction in the current year. Regardless of the use of the well, deductions will be permitted if the operations commence by March 31stof the subsequent year.

Tangible Drilling Costs

The real expenses of the drilling equipment are tangible costs. As deductible expenses, tangible costs are depreciated over a 7-year period. Referring to the example mentioned above, the project’s leftoveramount ($75,000) should be depreciated as per a 7-year schedule.

Active and Passive Income

According to the relevant tax code, a project’s working interest isn’t a passive activity loss. Therefore, net losses are actually active income, coupled with the wellhead production operations. Moreover, these losses can be balanced with other incomes, including interest, capital gains and wages.

Small Producer Tax Incentive

For small companies, this is one of the most attractive tax concessions. It offers a 15 percent gross income exclusion from wells and is designed to benefit small producers and investors. Therefore, any entity producing over 50,000 oil barrels (per day) or an investor owning over 1,000 oil barrels (per day) or 6 million cubic feet of natural gas (per day) are considered ineligible.

Some of the biggest advantages to oil drilling investments are also some of the most universally appreciated: Tax breaks!

Qualified investors can use the unique tax treatments of oil and gas drilling investment opportunities to generate income with cash flow that ordinarily wouldn’t have any earning potential. And, you don’t have to take a loss to get these tax advantages.

For example, one type of deduction involves intangible drilling costs (IDCs). IDCs include factors like a drilling project’s fuel and labor costs, as well as anything else aside from the actual drilling machinery and equipment. Typically, these IDCs make up around 70 to 85 percent of a well’s overall production costs.

So, imagine that you invested $100,000 in an oil-drilling operation. Let’s say that 80 percent of the associated costs were IDCs. According to current tax laws, you could subtract $80,000 from your total taxable income from the year that you made the investment!

On the other hand, tangible drilling costs (TDCs) represent the expenses of the drilling machinery, such as items like wellheads. The amount of money that you invested in these TDCs translates to depreciating capital, which means that you’ll gradually recover those costs over a span of several years.

Clearly, there are some extraordinary benefits to investments in oil and gas, and this is just the beginning. There are more tax deductions possible with oil investments than perhaps in any other investment field. Reach out to us, and we’ll get back to you on how you can start taking full advantage of these unique opportunities.

Qualified investors can use the unique tax treatments of oil and gas drilling investment opportunities to generate income with cash flow that ordinarily wouldn’t have any earning potential. And, you don’t have to take a loss to get these tax advantages.

For example, one type of deduction involves intangible drilling costs (IDCs). IDCs include factors like a drilling project’s fuel and labor costs, as well as anything else aside from the actual drilling machinery and equipment. Typically, these IDCs make up around 70 to 85 percent of a well’s overall production costs.

So, imagine that you invested $100,000 in an oil-drilling operation. Let’s say that 80 percent of the associated costs were IDCs. According to current tax laws, you could subtract $80,000 from your total taxable income from the year that you made the investment!

On the other hand, tangible drilling costs (TDCs) represent the expenses of the drilling machinery, such as items like wellheads. The amount of money that you invested in these TDCs translates to depreciating capital, which means that you’ll gradually recover those costs over a span of several years.

Clearly, there are some extraordinary benefits to investments in oil and gas, and this is just the beginning. There are more tax deductions possible with oil investments than perhaps in any other investment field. Reach out to us, and we’ll get back to you on how you can start taking full advantage of these unique opportunities.