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Everything You Need to Know About Tax Deductible Oil and Gas Investments

Are your oil and gas investments tax deductible?

Oil and gas investments may be tax deductible.

Many investors begin investing in oil and gas due to the returns they expect from this industry. However, there are more returns on your investment than you have probably considered. When you invest in oil and gas, you can also take advantage of tax deductions to maximize your returns. Understanding the tax deductions you may qualify for will help you determine whether oil and gas investments are the smart choice for your portfolio.

Working Interest Investment

In the early stages of oil and gas wells, there are a lot of startup costs, such as equipment and surveys. These expenses can be tax deductible for individuals who hold a working interest in these wells because of the high loss numbers they experience during the first several years the well is in operation. The tangible costs can be deducted over the course of the first seven years.

There are also intangible costs, such as grease, chemicals, labor and other needs associated with the daily operations of the well. These intangible costs are also deductible for investors with a working interest. They are deducted annually for the year they were incurred. None of these deductions are available for those who have a passive investment interest in an oil or gas well.

Taxable Limitations

Like most other tax laws, there are limitations on a taxpayer’s liability for their oil and gas investments. There are several ways an investor’s liabilities can be reduced, including:

  • A limited partnership in which the taxpayer is not a general partner
  • Stock in a corporation
  • An interest in another entity that limits potential liability

However, there are also arrangements that can be made to avoid violating these limitations, such as:

  • A stop loss arrangement
  • Insurance
  • An indemnification agreement
  • A combination of the above

Limited or General Partnership Interest

In some cases, individuals invest in oil and gas through a limited or general partnership interest. In these situations, investors will benefit from tax deductions as if they have a working interest in the wells, whether or not they actively participate in the drilling activities. This allows investors in oil and gas to take advantage of the tax benefits of their investments without placing any additional capital on the line for operations. While there is still risk involved, those risks are significantly lowered.

Investing in oil and gas can provide a number of returns on the investment. While most investors consider the cash returns they will see from production and sales, there are also tax deductions that can provide greater value. However, it is critical to understand tax liability and what expenses are deductible to ensure you properly follow tax code and maximize your returns.

If you’re interested in oil and gas investments, contact us. Our firm holds working interest in a number of oil and gas well projects to help you maximize your return on investment.

*Please note – This article is for informational purposes only. All interested parties should seek their own professionals for tax and legal advice.

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