Oil Investing Tax Breaks

You may be able to take advantage of many oil investment tax breaks — including both deductions and credits — which is just one of the reasons oil can make such a smart investment. Whether you already invest in oil or are just thinking about it, it’s important to know about these oil investing tax breaks.

Why Are There Oil Investment Tax Breaks?

Why do investors have access to oil tax breaks if there are so many incentives to invest in oil already? Because it’s not just about oil — it’s about dependence on foreign oil. By offering tax breaks, the U.S. government keeps oil drilling in-house and reduces our reliance on out-of-country energy sources.

What Are the Oil Investment Tax Benefits?

The oil investment tax benefits you can take advantage of as an investor involve several different investment types. Many oil investing tax breaks can be realized, but they differ depending on specific investment type. The five major investment types of the sector include the following:

  • Mutual funds: With mutual funds, investors are required to pay taxes for dividends and capital gains. They get tax advantages only by investing in another manner.
  • Stocks and American depositary receipts (ADRs): With this type of investing, an investment can be made in drilling companies. In fact, large oil companies are often publicly traded, which means buying shares is simple. Investors do not get direct tax breaks just by becoming shareholders, but they can reap indirect benefits. First, they experience less risk with stocks and ADRs than with other, more direct investment types. In addition, the company they invest in will likely receive tax advantages, indirectly boosting stock value through increased company profitability.
  • Working interests: Any income that comes from working interests has to be reported on Schedule C of a 1040 Form, and it’s subject to self-employment tax as well. However, most investors who have working interests go above the taxable wage base with their earnings. These working interests are eligible to receive a large number of tax breaks.
  • Royalties: Investors who own land where oil is found and drilled will receive royalties. They can’t assume liability, and they can earn 12 to 20 percent on gross production. Landowners do need to invest in another way to get tax breaks, however, because royalties are reportable.
  • Partnerships: On a pass-through basis, tax advantages are available to partnerships. Investors can avoid double taxation by taking advantage of partnerships, and taxes will rely largely on investments and revenues made from the partnership. They can offer the most robust tax breaks, but there’s a large range of partnerships, which means you’ll have to research carefully to get the best tax benefits.

There may be other tax credits or deductions the oil wells or company you invest in can take advantage of as well. To find out about how tax benefits can help your oil investment with Viper Capital Partners, contact us now.