Tax Benefits of Investing in Oil and Gas

Author: Greg Frazier, Senior Vice President, Director, Oil and Gas Management 07/18/2022

Investing in oil and gas can offer some individuals and entities ways to reduce their overall tax burden, while adding value to their investment portfolio. The following are some of the tax benefits available for oil and gas companies and investors.

Tangible and Intangible Drilling Costs

The expenses related to drilling can be defined as tangible or intangible drilling costs, which are subject to different tax rules. Oil and gas equipment such as pump jacks or wellheads that are purchased by the drilling company are considered tangible drilling costs. As an investor, you may be able to deduct the tangible drilling costs if they are depreciated over seven years.

Intangible drilling costs refer to many of the expenses associated with using any purchased drilling equipment, including labor, chemicals, and fuel expenses. You may have the option to deduct intangible drilling costs immediately after the oil and gas well begins production.

Active vs. Passive Income

According to the Internal Revenue Service (IRS), income that’s earned from oil and gas royalties can be considered passive income, while net losses may be categorized as active income. Some investors may be able to offset their production revenue losses from other forms of income, which can provide a tax break.

Lease Costs

If you’re an investor in oil and gas, you may be able capitalize on the expenditures you spent to acquire the lease from the mineral rights owner. The money allocated toward negotiating the oil and gas lease might qualify as tax deductible.

Depletion Allowance

Once a well is in production, the IRS offers small producers and investors a depletion allowance against their production revenue. In some cases, up to 15% of gross income associated with extracting oil and gas can be deducted from federal taxes. Your CPA can help determine if you’re eligible to take advantage of this type of tax break.

There are several factors that will influence how much your oil and gas investments will be taxed, including the state where your mineral interests are located. It’s important to speak with a CPA to understand your options and any tax implications. To learn more about making the most of your oil and gas investment, call 866.762.8392 or visit PlainsCapital’s oil and gas management page.

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