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Tax Benefits of Oil and
Gas Drilling
Intangible
Drilling Cost
Tax Deduction
The
intangible
expenditures of
drilling
(labor,
chemicals, mud,
grease, etc.)
range from (65
to 88%) of the
cost of a well.
These
expenditures
are considered
"Intangible
Drilling Cost
(IDC)", which
is 100%
deductible
during the
first year. For
example, a
$100,000
investment
would yield
from $65,000 to
$88,000 in tax
deductions
during the
first year of
the venture.
These
deductions are
available in
the year the
money was
invested, even
if the well
does not start
drilling until
March 31 of the
year following
the
contribution of
capital. (See
Section 263 of
the Tax Code.)
Tangible
Drilling Cost
Tax Deduction
The total
amount of the
investment
allocated to
the equipment
"Tangible
Drilling Costs
(TDC)" is 100%
tax deductible.
In the example
above, the
remaining
tangible costs
($35,000 to
$12,000) may be
deducted as
depreciation
over a five to
seven-year
period. (See
Section 263 of
the Tax Code.)
Congressional
Incentives
Encourage
Domestic
Petroleum
Development
Congress has
provided tax
incentives to
stimulate
domestic
natural gas and
oil production
financed by
private
sources.
Drilling
projects offer
many tax
advantages and
these benefits
greatly enhance
the economics.
These
incentives are
not "Loop
Holes" -- they
were placed in
the Tax Code by
Congress to
make
participation
in oil and gas
ventures one of
the best tax
advantaged
investments.
Alternative
Minimum Tax
Prior to the
1992 Tax Act,
working
interest
participants in
oil and gas
ventures were
subject to the
normal
Alternative
Minimum Tax to
the extent that
this tax
exceeded their
regular tax.
This Tax Act
specifically
exempted
Intangible
Drilling Cost
as a Tax
Preference
Item.
"Alternative
Minimum Taxable
Income"
generally
consists of
adjusted gross
income, minus
allowable
Alternative
Minimum Tax
itemized
deduction, plus
the sum of tax
preference
items and
adjustments.
"Tax preference
items" are
preferences
existing in the
Code to greatly
reduce or
eliminate
regular income
taxation.
Included within
this group are
deductions for
excess
Intangible
Drilling and
Development
Costs and the
deduction for
depletion
allowable for a
taxable year
over the
adjusted basis
in the Drilling
Acreage and the
wells thereon.
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