Tax Advantages

Oil and Gas development from domestic reserves reduces the country’s dependence on foreign oil imports.

Example of Potential Benefits to Investing in Oil and Gas

You will not find these tax benefits in stocks, real estate, or any other investment.

  • Intangible Drilling Costs: 100% tax deductible during first year.
  • Tangible Drilling Costs: 100% tax deductible.
  • Depletion Allowance: 15% of gross production revenue is tax-free.
  • Active Income Deductions can be deducted against business income, salaries, capital gross, interest income, etc.

The U.S. Congress has provided tax incentives to stimulate domestic production financed by private investment sources. These tax benefits may enhance the economics of an oil and gas investment. With the passage of the Tax Reform Act of 1986 (the “Act”), oil and gas ventures remain one of the few tax-advantaged investments. The Act specifically exempts oil and gas working interest from being classified as “Passive Income.” Consult your tax advisor for more detailed information.

Intangible Drilling & Development Cost Tax Deduction

In an oil and gas drilling project, a large portion of the investment is considered “Intangible Drilling Cost” (IDC), which may be 100% deductible during the year paid. The amount of tax deduction for IDC will vary depending on the nature of the drilling project.

Tangible Drilling & Development Cost Benefits

The total amount of the investment allocated to equipment, “Tangible Drilling Development and Completion Cost” (TDC), may be amortized and depreciated over 5-7 years.

Small Producers Tax Exemption

The 1990 Tax Act provided tax advantages for the typical investor in oil and gas drilling projects. This “Small Producers Exemption” allows 15% of any investor’s gross income for an oil and gas property to be TAX FREE, subject to certain limitations. The tax benefit is not available to large companies or taxpayers who sell oil or natural gas through retail outlets or those who engage in refining crude oil with runs of more than 50,000 barrels per day. It is also not available to investors owning more than 1,000 barrels of oil or 6,000,000 cubic fee of gas average daily production. The Joint Venture's drilling operations will quality for “Percentage Depletion” tax benefits. Each investor’s annual tax return should claim “Small Producers Exemption”, if applicable.

Active vs. Passive Income

The Tax Reform Act of 1986 introduced the concept of “passive” income and “active” income. The Act prohibits the offsetting of losses from passive activities against income from active businesses. The Act provides that a working interest in an oil and gas drilling program is not “passive” activity.   Accordingly, deductions can be offset against income from business income, salaries, etc.


* Investors should contact their personal tax advisors and  review tax aspects in the Confidential Information Memorandum.  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.

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