How to Reduce Taxable Income With Investments
How to Reduce Taxable Income With Investments
Investors have long been encouraged to aid the economy by providing the stimulus that leads to innovation, job creation, and opportunity. That encouragement is manifest in the tax advantages afforded to those who place their assets into developmental and resource projects.
Prudent use of income tax mitigation strategies may be a powerful wealth accumulation factor. After all, wealth creation can be as much judicious management of expenses as increasing revenue. Once you learn how to reduce taxable income with investments, you’ll likely uncover more available capital to invest in high-reward projects.
Let’s consider investing in a proven commodity such as oil to increase investment earnings coupled with income tax mitigation results.
How to Reduce Taxable Income With Investments: Preliminary Questions
Analyzing methods to reduce taxable income with investments in commodities like oil begins with a few basic questions:
1. Can I afford to invest?
Most direct participation offerings in the oil and gas require an “accredited investor” status.. Generally, individuals with annual income of $200,000 for the past two years and expectation of similar earnings in the current year or couples with joint earnings of $300,000 for the past two years and expectation of similar earnings in the current year or anyone possessing a net worth in excess of $1 million excluding the value of their primary residence are deemed to be “accredited investors.”
2. What are the benefits of income tax reduction?
For a specific investment, the amount of income tax savings attributable to the specific investment lowers the net cost of the investment. For example, assuming the investment participation cost is $100,000 and income deductions are generated by the investment equal to approximately 80% of invested capital, the resulting net cost of the investment, assuming a 40% income tax rate, would equal $68,000. In this example, the resulting income tax savings of $32,000 lowers the participation cost of the investment.
3. How much tax relief do I stand to gain?
Direct participation in oil and gas wells may generate allowable deductions ranging from possibly 70% to 90% of invested capital. These allowable deductions are generated primarily from intangible drilling costs (IDCs) and bonus depreciation allowances on tangible equipment for the capital used to drill or rework oil and gas wells.
4. What attributes apply to mitigated income tax strategies?
The primary attribute of direct participation in oil and gas wells usually requires an extending holding period of three to five years or possibly more. Many oil and gas wells may commercially produce for twenty years or more. Scalability of the oilfield investment and a plan of divestiture are desired attributes when considering a specific oil and gas offering. One important consideration: upon divestiture, the taxable gain reflect ordinary income tax rates to the extent intangible drilling costs deductions or bonus depreciation have been claimed. Any remaining portion of the gain would be taxed at capital gains rates.
As with any high risk investment, the important considerations when investing in the direct ownership of oil and gas mineral acreage and wells, the type of structure of the investing entity and the assets being acquired by the investing entity are essential components. Generally, a limited partnership with the option to elect to be a general partner or limited partner is the preferred structure of the investing entity. The assets conveyed to the investing entity would be all of the components of the development of the oilfield which would generally include oil and gas mineral leases, any current producing wells or proposed wells, any surface infrastructure, and upon the drilling of any new wells, participation in the creation of undeveloped drilling locations (PUDs) is highly desired.
Investing in Oil and Gas Ownership
Oil and gas energy fund investments may offer a reliable method of benefiting from income tax deductions. With the proper entity structure and appropriate elections, a direct participation in oil and gas wells would allow the participant to claim deductions which relate to drilling oil and gas wells against any other form of taxable income.
Ideally, the assets being acquired by the investing entity would own all of the components of the oilfield being developed in comparison to owning only a single oil well. The concept of an Oil Fund relates to the Fund owning the oilfield being developed and to accrete value from the entire oilfield.
Opportunities to participate in investment opportunities which reduce taxable income may provide a significant method for the accumulation of wealth.
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Investments in oil and natural gas partnerships are speculative and involve a high degree of risk. Oil and natural gas wells are naturally depleting assets. Cash flows and returns may vary and are not guaranteed. Past performance is no indication of future performance. Nothing herein shall be construed as tax or accounting advice. Investors may lose money. Some of the risks other than those described herein associated with investment in Larimer County Energy Fund are described in the Risk Factors section of the Confidential Private Placement Memorandum concerning the Larimer County Energy Fund accompanying, preceding, or following this Executive Summary. Prospective investors are urged to read and consider carefully the risks described in that section. Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of the investment opportunity described in this Executive Summary. Neither the Securities and Exchange Commission nor any state securities commission has determined the accuracy or completeness of the information contained within this Executive Summary or in the Confidential Private Placement Memorandum concerning the offering of limited partnership interests. The offering of limited partnership interests is made only by the Confidential Private Placement Memorandum, which must accompany, precede, or follow this Executive Summary, and an investment decision can only be made by the execution of definitive investment documents. Investors in Larimer County Energy Fund are required to be “Accredited Investors,” as defined in Rule 501(a) of Regulation D under the Securities Act of 1933.