The Savvy Investor's Ingredient: Oil and Gas

Investment Options for Oil and Gas

Investing in oil and gas stocks on public exchanges, or investing through direct private participation programs. 

Public Stock, Royalties, Working Interest, 

Tax Advantages:

The tax benefits for an Oil and Gas investment include three distinct mechanisms. Due to the tax code revision in 1986, the combintation of the following tax benefits make Oil and Gas one of the (if not the most) lucrative investment vehicles available:  

* 100% write-off of intangible drilling costs (IDCs)

* 100% depreciation write-off of capital equipment over 7 years

* 15% of income from the production is tax free (not a deduction)

Intangible Drilling Costs (IDC): Everything but the equipment: the Itangible Drilling Costs  (IDC) can account for 65-85% of total drilling costs. These costs are 100% deductible in the year incurred. The IDC deduction is an attractive incentive for investing in America’s independent oil and gas producers and allowing their investors  the flexibilty to offset their income. 

Tangible Drilling Costs (TDC): actual direct costs of drilling the well. 100% deductible, but must be depreciated over 7-years.

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.This means that the tax advantages mentioned above can be active against income incurred in conjunction with oil and gas (well-head) production and can be offset against other forms of income, such as wages, interest, capital gains, etc.

Small Producer Tax Exemption (“Depletion Allowance”)- 15% of all gross income from producing wells. Excluded if the company; produce/refines over 50,000 barrels of oil per day, or own more than 1,000 bopd, or 6 mcf gas per day and subject to avergage anual pricing curve per EIA.

Lease CostsPurchase of lease and mineral rights, lease operating costs, and all administrative, legal, and accounting expenses. (100% deductible in year incurred or ammortized over life of lease/production).

Such an attractive list of tax advantages for the oil and gas industry illustrates how serious the U.S. government is about developing the domestic energy infrastructure.