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Oil refinery plant in the evening

Oil & Gas Program Benefits

Intangible Drilling Cost Deductions, Depletion Allowance and Tax Advantaged Income

Leaf Pattern Design
Current Year Tax Deductions with Potential Cash Flows from Operations

Oil and Gas programs have historically been a great source of current year deductions against income based on partnership pass through of what is called intangible drilling costs (IDCs).  Typically, as a general partner, one can deduct these costs against any type of income.  It is common for these programs to have offerings issued during the calendar year and close by December 31 of that year with cash flow targeted to begin the following year.

Intangible Drilling Costs,
Tangilbe Drilling Costs and Depletion Allowance

Intangible Costs typically include expenses made by an operator that cannot be recovered and are necessary in the drilling and preparation of wells for the production of oil and gas, such as survey work, ground clearing, drainage, wages, fuel, repairs and supplies.

Tangible Costs typically include costs pertaining to the actual direct cost of the drilling equipment, such as well rigs and machinery.

Depletion is an accounting and tax concept used most often in the mining, timber, and petroleum industries. It is similar to depreciation in that it is a cost recovery system for accounting and tax reporting.  "The depletion deduction" allows an owner or operator to account for the reduction of a product's reserves.

Schedule E Business Loss​

Most offerings allow investors to join as General Partner which may provide a sizeable potential deduction, of up to 92% of the investment, against any type of income.

As cash flow from operations do not start until the following year, this deduction is typically represented as a Schedule E business loss on the tax return in the year of investment.

Well Drill
Tax Advantaged Income

Oil & Gas programs offer the potential to receive cash flows from operations until the oil and gas are depleted.

Operations typically begin the year following investment as the wells are activiated.  Cash flows are typically tax advantaged as partners are allocated their prorata share of depletion allowance (15% of income per year) and other potential expenses.

Hypothetical Oil & Gas Illustration​

The illustration below represents a hypothetical participation in an oil and gas program and not indicitave of any specific program or investment.  Key assumptions include:

  • Initial investment of $300,000

  • Total assumed combined tax bracket of 28%

  • Intangible Drilling Cost deduction of 90% of investment

  • Cash flow total of about 1.8 x original investment over 10 years

In this example, the investor receives a significant current year deduction of $270,000 which results in a tax savings of $75,735 ($270,000 x 28.05%).  Cash flows begin the year after investment and continue until the wells are depleted.  There is an annual 15% depletion allowance that offsets income tax on cash distributions.

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Note:  This is a fictional illustration and does not reflect any specific offering or investment.  The intention is to show potential tax treatment of IDCs and cash flow.  Oil & Gas programs may not produce expected cash flow which could result in complete loss of investor captial.

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