Cannon Operating-Tax Incentives

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

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Intangible Drilling Costs

These include everything but the actual drilling equipment. Labor, chemicals, mud, grease and other miscellaneous items necessary for drilling are considered intangible. These expenses constitute 65%-80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if it costs $300,000 to drill a well, and if it were determined that 75% of the cost would be considered intangible. The investor would receive a current deduction of $225,000.

Tangible Drilling Costs

Tangible drilling costs pertain to the actual direct cost of the drilling equipment. These expenses are also 100% deductible. However, these expenses must be depreciated over a period of five to seven years. Therefore, in the previous example. The remaining $75,000 could be written off according to a seven year schedule.

Active Vs Passive Income

The Tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. Meaning that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest, and capital gains.

Small Producer Tax Incentive

The small producer tax incentive is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day or 6 million cubic feet of gas.

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.