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The Ultimate Oil and Gas Investment Tax Guide

Find out how taxes affect an oil and gas investment.

Learn how an oil and gas investment affects taxes.

One of the biggest concerns you may have with oil and gas investment opportunities is the tax implications. While there are oil and gas investment tax deductions, there will still be taxes you need to understand to protect your financial future. This tax guide will help you better understand the benefits you will enjoy and other tax issues you could be facing when you make these investments.

Benefits of Striking Oil

When it comes to well drilling, there are tax deductions that can be associated with your oil and gas investments, depending on your level of involvement:

  • Intangible drilling costs (IDCs), including expenses necessary in well preparation and drilling, such as surveys, clearing the ground, fuel, repairs, wages and supplies are completely deductible even if the well strikes or produces oil.
  • Passive versus active income tax code deems a working interest is active income, meaning net losses incurred with well-head oil production can  offset other income including capital gains, interest and wages.
  • Small producer tax exemptions, also known as the depletion allowance, excludes taxation on 15% of gross income. Companies producing 50,000 barrels or more per day or are ineligible.
  • Lease costs including mineral right purchases, operation costs and administrative expenses are deductible in some situations.

Limiting Your Tax Liability

Before you enter into oil and gas investments, it’s important to make sure you know how to limit your liability to protect the rest of your financial assets. To qualify for this limited liability, you must be involved with the project as:

  • A limited partnership other than a general partner
  • A stock holder in the company
  • An interest in another entity that automatically limits liability

Some of the other arrangements that don’t break these liability laws include:

  • A stop loss agreement
  • An indemnification agreement
  • Insurance
  • Any other similar arrangement

*This is for informational purposes only. Everyone’s tax situation is different and we recommend you seek a tax professional for guidance.

Investment Options

When you’re considering oil and gas investments, it’s important to make sure you understand the tax implications of these investments. For instance, mutual funds require investors to pay taxes on the dividends and capital gains they obtain. Partnerships, particularly limited partnerships, often offer tax incentives for investors, rather than implications. Other potential investment options can include royalties and working interests, which pay investors based on the performance of a particular well. It’s important to talk to an experienced tax professional before you make any investments to ensure you are fully prepared to receive any tax incentives or payments you may incur.

Investing in oil and gas can be a lucrative option. Even though the value of gas and oil is constantly fluctuating, it is often a useful element in your portfolio to ensure greater stability overall. However, there are tax details you should know before you get involved in the oil and gas industry. Understanding these laws will help you choose the best oil and gas investment opportunities.

If you’re thinking about adding oil and gas investments to your portfolio, contact us. We offer a variety of investment options in this lucrative industry with significant tax advantages.

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