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Oil & Gas Program Benefits

Intangible Drilling Cost Deductions, Depletion Allowance and Tax Advantaged Income

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Current Year Tax Deductions with Potential Cash Flows from Operations

Oil and Gas partnerships have historically been a great source of pass through deductions called intangible drilling costs (IDCs) as well as depletion allowance.

Intangible Drilling Costs

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

Tangilbe Drilling Costs 

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

Depletion Allowance

Depletion is a cost recovery system for accounting and tax reporting.  A depletion deduction allows an owner or operator to account for the reduction of a product's reserves pver time.

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.

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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.

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Hypothetical 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 $200,000

  • Total assumed combined tax brackets of 43%

  • Intangible Drilling Cost deduction of 90% of investment

  • Cash flow total of about 1.5 x original investment over 10 years

In this example, the investor receives a significant current year deduction of $180,000 which results in a tax savings of $77,400 ($180,000 x 43.00%).

Intangible Drilling Cost Deduction

Drilling Fund investment                                        $200,000

Potential Intangible Drilling Cost Deduction              90.0%  Target deduction % that may change annually

Intangible Drilling Costs (IDCs)                             ($180,000)  Reported as business loss on schedule 1040 line 8

                                                                                                         & loss from business Form Schedule E

Estimated Tax Savings from IDCs                          $ 77,400    Tax rate multiplied by intangible drilling cost deduction

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.  Oil wells typically surge oil in early years and reduce flows towards the end of its useful life.  A good analogy is a champagne bottle once it is opened.  A typical well might be expected to flow for on average 10 years.  Below is a cash flow chart that illustrates one potential scenario.


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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