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Tax Benefits for Oil and Gas Investors

There are several major tax benefits available to oil and gas investors which makes this investment unique above all others. U.S. tax codes favor investment in energy resources and oil and gas lead the way with a catalog of incentives for investors as well as oil producers. Below are just a few of the key incentives.

Primary Tax Benefits of Investing In Oil

  • Intangible drilling cost: These include everything except the actual drilling equipment. Labor, chemicals, mud, grease, paraffin, and other miscellaneous items necessary for drilling. These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% tax deductible in the year incurred. So, a million dollar investment could deduct approximately $800,000 right away, which would generate a net tax savings of approximately $280,000 in year one (assuming a 35% tax bracket), reducing the net investment by 28%. Furthermore, it doesn’t matter whether the well actually produces or even strikes oil. As long as it starts to operate by March 31 of the following year, the deductions will be allowed.
  • Tangible drilling costs: Tangible cost are those directly related to the cost of the drilling equipment. These expenses are also 100% deductible but must be depreciated over seven years. Therefore, in the example above, the remaining $200,000 could be written off according to a seven-year schedule.
  • Active vs. Passive Income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest, and capital gains.
  • Small Producer Tax Exemptions: This is perhaps the most enticing tax break for small producers and investors. This incentive, which is commonly known as the “depletion allowance,” excludes from taxation 15% of all gross income from oil and gas wells. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.
  • Lease Costs: These include the purchase of lease and mineral rights, lease operating cost and all administrative, legal and accounting expenses. These expenses must be capitalized and deducted over the life of the lease via the depletion allowance.

DISCLAIMER: Viper Capital Partners LLC, is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice. The information on this page is for educational purposes only. Individuals should consult their own tax professional for advice. Viper Capital Partners LLC offers no professional tax advice.

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Crude

This week’s

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Crude Oil, West Texas Intermediate (WTI) Technical Outlook and 2018 Forecast

West Texas Intermediate currently trades at 60.30 with the 2018 high at 66.63 and the 2018 low at 58.05.  United States crude oil inventories are down 6 million barrels year to date and down 46.7 million barrels in the last 6 months. Whats troubling is this draw down with inventories continued during the 2017 fall and winter seasonal low demand period.  This clearly sets the stage for continued rise in prices as we move into the 2018 high demand months.

From a technical perspective, WTI is trading within a consolidating pattern with a series of daily lower highs and daily higher lows since the  January 25 2018 high(66.63)  and the February 9, 2018 low (58.05). This consolidating wedge pattern most always follows a strong trending market which in this case, began with the June 2017 low 42.03 and continued until the January 2018 high.

However, while prices remain above the technical level 51.43, look for further rise to the 2018 high 66.63 as a daily open and higher close above 67 will support further rise to 69.91, 71.93 followed by 76.63 .  To the downside, a daily open and lower close below 51.43 will support further price decline initially to 45.43.