KEY TAX BENEFITS OF OIL INVESTMENTS

As an ancillary benefit to generating potential revenue, our oil and gas drilling ventures are specifically designed as Joint Ventures to take advantage of the lucrative active tax deductions available to qualified partners who participate in them. Under the current tax law (Section 263.c) for example, drilling expenses and production income currently both offer excellent tax advantages with most partners getting to write off 100% against their ordinary income. 

Oil and gas well development generates a unique expense category – intangible drilling costs (IDCs). These costs, unlike the drilling equipment itself, are used up during the drilling process and cannot be recovered. Think of them as the essential supplies used for drilling, including labor, drilling fluids, testing materials, and various chemicals.  IDCs typically account for a significant portion of the well's total cost, ranging from 70% to 90%. The good news for investors? Their share of these IDCs can be deducted from their taxes in the very year they're incurred with the remaining costs depreciated over 5-7 years.

Are fully deductible in the year the costs are incurred.

The 1986 Tax Reform Act created a distinction between "passive" and "active" income. While losses from passive activities can't be used to reduce taxes on active income, the Act offers a significant advantage for oil and gas investments. Owning a working interest in an oil and gas drilling program is considered active  – meaning  losses from drilling can be offset against income from your business, salary, and other active sources.

Lease Operating Expenses begin once a well is in production. Expenses are netted against production revenue and are 100% deductible.

There is a tax deduction available for qualifying statutory depletion. Generally, 15% of the gross income from a producing well is tax-free subject to certain limitations.

Net revenue from a producing well is treated as operating income; it is not treated as passive activity and is considered self-employment income (Schedule C), with a tax rate of 15.3%.