Domestic Oil Investments

Watch this video to learn how domestic oil and gas production is favored in the tax code.

Domestic Oil and Gas Production Is Favored In The Tax Code
When it comes to tax-advantaged investments for wealthy investors, one investment class continues to stand alone above all others: oil. With the U.S. government’s backing, domestic energy production has created a litany of tax incentives for both investors and small producers.

• 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 generally constitute 80% to 90% of the total cost of drilling a well and are 100% deductible in the year incurred.
• Tangible Drilling Costs: Tangible costs pertain to the actual direct cost of the drilling equipment. These expenses are also 100% deductible but must be depreciated over seven 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 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 Exemptions: This 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 per day, are excluded as well.
• Lease Costs: These include the purchase of lease and mineral rights, lease operating costs and all administrative, legal and accounting expenses. These expenses are 100% deductible in the year they are incurred.
• Alternative Minimum Tax: The excess intangible drilling costs have been specifically exempted as a “preference item” on the alternative minimum tax return.

Please speak with your financial advisor on how these policies might benefit you.

View Sample Tax Returns with and without an investment in domestic oil.