What To Know About Oil Investment Tax Breaks
What To Know About Oil Investment Tax Breaks
An investment in oil and natural gas may begin to generate rewards before a single well starts producing, or the value of the oil and gas mineral leases may increase in value as the development of a specific region of an oil basin is developed. Additionally, Oil Fund investors may benefit from oil investment tax breaks that can produce significant savings during the first year of a project.
Congress has long valued the contribution of oil and natural gas investors, and to encourage US domestic production has enacted laws that provide tax advantages available across the following areas:
- Tangible drilling costs
- Intangible drilling costs
- Lease operating costs
- Small producer exemptions
- Depletion allowances
Direct investment in an oilfield, and the accompanying tax breaks, become particularly appealing when pursued through an innovative new oil and natural gas investment model. In this article, we’ll take a closer look at each of the tax advantages mentioned above.
Oil Investment Tax Breaks for Oil Fund Partners
Oilfield development is a complex business which the oil and gas industry has evolved into specific phases of development which commonly are referred to as drilling, testing, completing, stimulating, and equipping.
1. Tangible Drilling Costs
Tangible drilling costs, which are generally handled by a third-party expert, consist of tangible personal property which is placed both below the surface and on the surface. Examples of below surface equipment are casing, tubing, rods, and downhole pumps. Surface equipment generally consists of a free water knock out vessel, heater treater, electronic panel box, wellhead and associated components, pumpjack, oil and water tanks, and gathering system.
The more immediate impact is associated with intangible drilling costs.
2. Intangible Drilling Costs
Intangible drilling costs include all labor and other intangible items such as drilling mud, chemicals and solvents, hydraulic fracturing stimulation procedures, consumable supplies, and any other intangible cost required to drill, test, complete, or stimulate. Depending on the type of well being drilled and any required procedures, the intangible drilling costs may represent a range of 65% to 90% of the cost of drilling a well. That’s a significant reduction in tax liability and can be viewed as an immediate return on investment.
A recent case study highlights the potential savings. In this example, current year deductions reduced a $1 million taxable income by one half, lowering the current year income tax due from approximately $400,000 to $200,000. Before a single drop of oil was produced, this investor reduced his tax liability by approximately 50%.
3. Lease Operating Costs
The IRS allows you to deduct Lease operating expenses. These costs represent the daily operating costs of a successful producing well. Examples include utilities such as electricity, maintenance and repair costs, pumper charges (individuals who monitor the operations of the well), insurance, and other operational costs. These costs are commonly referred to as “lift costs.”
4. Small Producer Exemptions
Oil investment tax breaks include incentives for producers of limited oilfields. A project that produces less than 50,000 barrels a day is eligible for special consideration before the IRS.
5. Depletion Allowances
As oil and natural gas are finite resources, the IRS allows investors to draw tax relief from the fact that their holding will devalue, or become depleted, over time. Two computations are made each year to determine the amount of the allowable Depletion deduction. These two deductions are referred to as either percentage or cost Depletion.
Oil Investment Tax Breaks Are for Everyone
The tax advantages outlined above are potentially available to every oil and natural gas investor. They are not the exclusive domain of international conglomerates or those with the highest-paid accountants, and they can help make investing in the world’s most important commodity affordable.
By shifting the focus of oil investment to a clearly defined and timely project with multiple exit points, the new generation of energy funds uses the tax breaks currently available to potentially reduce the risk and increase the profitability of oilfield opportunities.
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.