Tax Advantages

Alternative Income Investment with Tax Favoritism*

Investing in oil and gas can be one of the most tax-advantageous investments available. 

Income from oil and gas working interests, if held directly or through a general partnership, generally is not classified as income from a passive activity. 

Typically most of the investment, called Intangible Drilling Costs (IDC), is deductible in the same tax year and can be offset against active or ordinary income such as; salaries, commissions, bonuses and other types of compensation from regular business activities received from sole proprietorships, corporations or partnerships. 

For every dollar of IDC invested, the investor receives one dollar of deduction. 

IDCs can make up roughly 85% of the total investment. By way of illustration, an investment of $100,000 made in a Primo Group Joint Venture could yield up to $85,000 in tax deductions for the year the investment is made. For an investor in a 40% tax bracket, that could mean actual tax savings of up to $34,000 in the first year.  (See Tax Worksheet to the right) 

The IDC deduction, a non-preference item, reduces the investors Adjusted Gross Income and lowers the clients Alternative Minimum Tax.** 

For certain “independent producers” the IRS code allows for a deduction, the greater of either percentage or cost depletion. Currently, percentage depletion is 15% of well revenues. 

The IDC deductions reduce an investors dollars at risk. 

Many feel that oil and gas drilling funds may be the only real tax shelters left.***

*Each prospective investor should satisfy himself or herself as to the Federal and/or State income and other tax consequences of participating in this investment by obtaining advice from his or her own tax advisor. Tax considerations of oil and gas investment can be complex, unique and subject to change by the IRS. Information on this website is NOT intended to offer tax, financial or accounting advice. But, to provide information only..

**The rule is 40% of the taxpayer’s AMT can be deducted and still use the full deduction in the year of the investment. An investor should consult with his or her own tax advisor about the AMT.

***Tax-advantaged Securities Handbook, Vol. 2, Robert J. Haft and Peter M. Fass

Intangible Drilling and Development Costs (IDC) – IDC tax treatment is designed to attract capital to the high risk business of natural gas and oil production. IDC generally include any cost incurred that has no salvage value and is necessary for the drilling of wells or the preparation of wells for the production of natural gas or oil.

Tax Worksheet

Click on the chart below to open a printer-friendly new window.