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Tax Advantages

Overview

In 1986, the United States Federal Government passed the Tax Reform Act of 1986 to encourage domestic oil and gas exploration in an effort to reduce our dependence on foreign supplies. With the passage of this act, oil and gas drilling programs are now one of the most tax advantaged investments. The Act specifically exempts oil and gas working interest from being classified as "passive income", therefore all deductions can be used to offset "active" or "ordinary" income. (Tax Code Section 469 c.3)

IDC Deductions

Intangible Drilling Costs are the drilling and testing portion of the investment. IDC's include the labor, fuel, repair, geology and engineering work, roadways, rock, geophysical logging, hauling, supplies, etc. incident to and necessary for the drilling and preparation of wells for the production of oil and gas, including the work done by contractors. The IDC's generally run around 90% of the total investment and can be written off ordinary income in the first year. (Tax Code Section 263)

TDC Deductions

Tangible Drilling Costs are the completion portion of the amount of the investment and incorporates the costs of placing a well in production such as well production casing and surface/subsurface equipment. The TDC's are reported as depreciation on the tax return as an expense. This portion of the investment is depreciated over a 5 to 7 year period.

 

Each investor should consult their tax advisor concerning the precise manner in which this investment would benefit their actual income taxation status.