Tax Benefits of Direct Participation

When it comes to tax-advantaged investments for wealthy or sophisticated investors, one investment class continues to stand alone above all others: oil. With the U.S. government’s backing, domestic energy production has created tax incentives for both investors and small producers. Major tax benefits are available for oil and gas investors that are found nowhere else in the tax code.

Oil Tax Breaks and Energy Infrastructure Development

These tax breaks effectively illustrate how serious the U.S. government is about developing the domestic energy infrastructure. Perhaps most telling is the fact that there are no income or net worth limitations of any kind for any of them other than what is listed below (i.e. the small producer limit). Therefore, even the wealthiest investors could invest directly in oil and gas and receive all of the benefits listed herein, as long as they limit their ownership to 1,000 barrels of oil per day.

No other investment category in America can compete with the tax breaks that are available to the oil and gas industry. This special advantage is limited solely to small companies and investors. Any company that produces or refines more than 50,000 barrels of oil per day is ineligible. Entities that own more than 1,000 barrels of oil per day, or 6 million cubic feet of gas per day, are excluded as well.

Cost Recovers and Depletion
Investors in private oil and gas projects can benefit from a depletion allowance of 15% of his or her gross income from the project. A depletion allowance allows an investor to account for the reduction of reserves as oil and gas are produced. This means that fifteen cents per dollar of gross income is tax free.

Maximizing Income
The Tax Reform Act of 1986 prevents individuals from using active business income to compensate for losses in passive activities. The act states that working interest in oil or gas investments is not a passive activity, and therefore deductions can be used to counteract active income from salaries, stocks, and business profits.

Reduced Dollars at Risk
There are three main costs associated with drilling an oil an gas well: intangible, tangible, and lease costs. Intangible Drilling Costs, or IDCs, are labor-intensive costs of the drilling process. Investors can write off the entire cost of the project the first year or they have the option to amortize the write off for five to seven years.

Alternative Tax Calculations
Under the Alternative Minimum Tax, or AMT, taxpayers must compute taxes twice, once using the traditional method, and again using AMT. Once the AMT calculation is completed, it is compared to the traditional tax calculation. The taxpayer must then pay the higher amount calculated though the two methods.

*Tax considerations vary depending on your personal tax situation. Please consult your tax advisor before making any oil and gas investment decision. Note that current law is subject to change. Certain tax rules may limit a partner’s ability to take tax deductions from a Lonesome Dove Energy, LLC Joint Venture Partnership.