It is essential for the investor to calculate their tax position before considering an Oil or Gas (O&G) investment. One of the most significant cost features in oil and gas investing is the effect of federal income tax legislation. It is important that an investor understands the tax advantages in order to fully appreciate the benefits of investing in oil and gas exploration and production. Briefly stated, the investor uses a portion of their tax dollars for investing instead of sending that money to the government for yearly income tax payment. This tax break is given as an incentive to encourage new drilling ventures within the United States.

Producing Well: Generally your investment includes what are known as intangible drilling costs (IDC’s) and they may be written off your ordinary income in the first year. IDC’s include labor intensive costs such as the drilling contractor and professional services which are reported to the investor at the end of the each year via K-1 information.

Generally your investment also includes Tangible Drilling Costs which are depreciated over a five to seven-year period using the Accelerated Cost Recovery System (ACRS). Tangible drilling costs include pipe, storage tanks, and wellhead equipment, capitalized and depreciated.

Percentage Depletion Allowance: Currently 15%, making fifteen cents of every gross income dollar non-taxable, thereby producing tax sheltered income.

Dry Hole: 100% of all dollars invested are written off as a loss against your ordinary income in the first year.