One of the most attractive oil and gas tax deductions available for investors in direct participation programs is the depreciation deduction. According to the IRS code, most salvageable equipment used to develop the well or produce the oil and gas can be depreciated over a seven year period. Intangible costs related to well development can also be deducted.
This can include the costs for renting drilling rigs, paying wages to laborers, buying fuel and supplies, making repairs, and many of the other costs incurred from the oil or gas investment. These kinds of oil and gas tax deductions make an already lucrative investment option even more attractive for sophisticated investors trying to reduce their tax burden.
There are additional oil and gas tax deductions available to accredited investors. The most attractive oil and gas tax deductions are listed here:
- Percentage depletion deduction. Up to 15% of the gross income produced by the oil or gas well can be deducted through percentage depletion deduction. Marginally producing oil and gas wells may be able to realize deductions as high as 25%.
- Geological deductions. Legislation was created especially to allow oil and gas tax deductions for geological and geophysical analyses, deductions that historically did not used to be allowed.
- Self-employment and minimum alternative taxes. As a general partner in an oil or gas investment, an investor may be liable for self-employment taxes, but on of the many IRS codes covering oil and gas tax deductions specifies that the losses from a well can be used to offset self-employment taxes. There is also oil and gas tax deductions that can offset alternative minimum tax that may be due.
- Non-passive investment. Most investments are considered passive activities, but the IRS recognizes a working interest in oil and gas properties as non-passive, and the income from the well is also treated as non-passive.
- Marginal well production credits. If the published reference price for natural gas or the price of a barrel of oil falls below a certain level, some investors may be eligible for additional oil and gas tax deductions in the form of marginal well production credits. These credits can be up to 50 cents per mcf or up to $3 per barrel of domestic oil.