Congressional Incentives – investments thanks to the passage of the Tax Reform Act of 1986. Oil and gas working interests are specifically exempt from being classified as “Passive Income” (See Section 469( c )(3) of the Tax Code.)
Federal Income Tax Deductions are:
Intangible Drilling Cost – For the first year, it is up to 100 percent.
Includes: All of the labor intensive costs including the drilling contractor, professional services and so on. For tax reporting purposes, the total amount of the Intangible Drilling Costs (IDCs) are reported to the investor at the end of the year.
Tangible Drilling Costs – This is equal to 100 percent of costs during a period of 7 years. Includes in these costs are: necessary pipe, storage tanks, and wellhead equipment, which are capitalized and appreciated.
Depletion – This tax incentive is better known as the “Percentage Depletion Allowance,” encourages smaller investors to participate in oil and gas drilling. Large oil companies are not able to take advantage of this tax benefit. The “Small Producers Exemption” allows 15 percent of the gross income from oil and gas production property to be tax free.
Basic tax considerations that are involved with oil and gas drilling programs are:
Dry Hole – 100 percent of all of the dollars invested are written off as a loss against your ordinary income in the first year.
Producing Well – About 70 to 80 percent of your investment consists of Intangible Drilling Costs (IDCs) and are written off of your ordinary income during the first year. About 15 to 30 percent of your investment consists of Tangible Drilling Cost (well equipment). This part of your investment depreciates over 7 years using the Accelerated Cost Recovery System (ACRS).
Depletion Allowed – The current allowance is 15 percent. 15 cents of every income dollar is un-taxable, and this produces tax-sheltered income.
*The above information is for general purposes only. This information is not intended to be used as individual tax advice and every individual should consult their personal tax advisor about the applicability and effort on each personal tax situation. The laws are known to change now and again and there is no real guarantee of the future interpretation of the tax laws.
The above tax rates went into effect on January 1, 2013. The above chart is based on the taxpayer filing jointly with his/her spouse. In addition, self employed individuals may pay an additional 1.45% of income for Medicare taxes. The above chart is to be used for general information only and should not be considered as individual tax advice. Consult your personal tax advisor.