Private sources can also be used to finance oil production. Drilling projects have many tax benefits that can help boost the economy. These incentives aren’t “Loop Holes”; they were created to make participation in oil and gas projects one of the most tax-beneficial investments available to accredited investors who seek tax relief.
How the Oil Tax Benefits Work
Investors receive several major taxes which aren’t available anywhere else in code. Below we discuss the tax advantages of oil investments, and how you might use them to build your portfolio. The tax benefits of oil investments include:
Intangible Drilling Costs Deduction
The intangible costs of drilling (labor and chemicals, mud and grease, etc. They typically account for 65 to 80% (or more) of the cost of drilling a well. These costs are known as “Intangible Drilling Charge (IDC),” and can be 100% deducted during the first year. In other words, $100,000 could bring in $80,000 worth of IDC tax deductions. These deductions are available for the year in which the money was invested. (See Section 263 Tax Code.
Tangible Drilling Cost Terrorism Deduction
The investment amount for the equipment “Tangible Drilling Capitals (TDC),” is 100% tax-deductible. In the case above, the $20,000 remaining tangible cost may be deducted for depreciation over seven years.
Tangible cost refers to the actual total cost of drilling equipment. These expenses can be deducted 100%, but must also be amortized over seven-year. In the above example, $75,000 of these expenses can be deducted at 100% but must be amortized over seven years.
Active vs. Passive Income
A working interest (as opposed a royalty) in an oil-and-gas well is not considered a passive activity. This means all net loss is active income that was incurred in connection with well-head output. It can be offset against any other forms of income, such as wages or interest.
Small Producers Tax Exemption
This tax incentive, called the “Percentage Depletion Allowance”, was designed to encourage participation and investment in oil and natural gas drilling. This tax incentive is not available to large oil firms, retail petroleum marketers, refiners that process more than 50,000 barrels per hour, or refiners. It does not apply to entities producing more than 1,000 barrels (or 6,000,000 cubic feet) of oil per day. The “Small Producers Exemption”, 15% of the Gross Income (not Net) from an oil and gas producing property is exempted taxes.
This is possibly the most attractive tax incentive to small producers or investors. This special incentive, commonly known as depletion allowance, excludes 15% of all net income from oil and natural gas wells.
Drilling expenses that are not tangible
Intangible drilling fees are all expenses except for the actual drilling equipment. Immaterial are all labor, chemicals, mud, and other miscellaneous costs associated with drilling. These expenses usually amount to 60%-80% of the total cost for drilling a well. They are 100% deductible in the year they are incurred. It doesn’t matter if the well produces or strikes oil. It is allowed to deduct the costs as long it begins operation by March 31st the following year.
Lease Costs
These expenses include the purchase of lease or mineral rights as well as lease operating and administrative costs. These expenses should be capitalized. They can then be deducted from the lease over the duration via the deduction allowance.
Lease costs (purchase of leases or minerals) by cost depletion, all sales expenses, and legal costs, administrative accounting, as well lease operating costs (LOC), can be 100% tax-deductible.
Alternative Minimum Tax
AMT was designed to ensure that taxpayers paid the minimum tax or their fair share. This is done by recalculating the income taxes owed and adding back specific preferential or other tax items.
Oil Tax breaks and Energy Infrastructure Development
Notably, no income or net wealth limitations are set aside for the list above (i.e. small producer limit). Anyone can make direct investments in oil or gas. They will receive all of these benefits provided they do not exceed 1,000 barrels of oil per daily. No other investment category can compete with the abundance of tax breaks available to the oil & gas industry.
