Entity Choices & Valuable Tax Advantages in Oil and Gas Investments

If you are wondering about the intricacies of entity choices for your Oil & Gas investments, and how that reflects on your potential tax burden, a recent article from Saville CPAs & Advisors, L.L.C. delved deeply into this topic. For potential Oil and Gas investors, this article offers valuable insights into tax strategies and entity choices that can impact their financial returns and tax liabilities in this complex industry.

For more insights into the potential tax advantages of Oil and Gas investments, Crown Exploration has a wealth of knowledge. Contact us at 972-395-1133. Your Oil and Gas investment begins with a conversation.

Entity Concerns for Oil & Gas*

The Energy industry is influential in the United States. There have been numerous changes to the tax code proposed in Congress, and the industry’s landscape is constantly changing. The complexity of the tax code affords many pitfalls and opportunities.

Directly investing in crude oil and natural gas production in the United States can benefit individuals. These investments can provide lucrative tax benefits and attractive returns to investors. Taking advantage of these benefits can be complex. One of the industries Saville focuses on is Energy. Selecting the correct entity type can maximize tax benefits.

Generally, forming an entity helps individuals separate personal accounts from their business activities or other investments. Partnerships and S-corporations are pass-through entities, meaning they are not subject to tax; the business income and expenses are taxed on the partners’ individual tax returns.

A partnership can be an excellent tool for clients to invest in oil & gas because of the Working Interest Presumption. This presumption means that an investment in an oil & gas working interest (direct involvement in production) is assumed active for passive activity limitations regardless of any participation by the taxpayer. However, it is only available if the taxpayer has unlimited liability. The only partnership type with unlimited liability for all partners is a general partnership. A limited partnership allows the working interest presumption for its general partner only. Other partners will be required to participate a certain number of hours per year in the activity to be considered active. If a taxpayer undertakes these investments as an individual outside of a partnership, they also have unlimited liability and the Working Interest Presumption.

For an investment presumed active, if expenses are more than income, these losses can be deductible for the taxpayer in the year they are incurred. If the investment is considered passive, the losses may be required to be carried forward into future years unless the taxpayer has other passive income sources.

An S-corporation is another pass-through entity. A factor to consider when investing in a partnership rather than an S-corporation is the step-up in basis upon the transfer of partnership interest due to a partner’s death or sale of the interest. For example, if the partnership interest contains royalties that generate income that has been fully depleted, the step-up in basis would allow the royalty value to be depleted again. An S-corporation will not get the benefit of a step-up.

There are even more factors to consider. All of these considerations can be complex. Please reach out to your essential partners at Saville to ensure you have the most advantageous entity structure for your energy investment needs.

IRS Circular 230 Notice:  The statements contained herein are not intended to and do not constitute an opinion as to any tax or other matter.  Any statement contained in this communication (including any attachments) concerning U.S. tax matters is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.

* "Entity Concerns for Oil & Gas." Saville CPAs & Advisors, L.L.C., 22 Jun. 2023, newsletter.homeactions.net/archive/full_article/10694/6707883/5090033/181220. Accessed 13 Sept. 2023.