Oil And Gas Investment Tax Advantages

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Everything You Need To Know About Tax Deductible Oil And Gas Investments

The Tax Benefits Of Oil And Gas Investing

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.

Tax Benefits Of Direct Oil And Gas Investments

No other industry allows for unique tax benefits such as the oil and gas exploration industry. In fact, the energy industry enjoys some of the most lucrative advantages available in the United States tax code. This is why sophisticated investors who are on the lookout for portfolio diversification that offers robust tax advantages turn to oil and gas investments.

Below is a brief introduction to the key tax benefits that are available for direct oil and gas investments.

Ranken Energy Working Interest Program Considerations

Ranken Energy Working Interest Drilling programs today certainly have a good probability of striking oil and/or gas, which means you the investor earn income. And your income is partially sheltered from taxes because of a depletion allowance. Here is why:

IRS tax code Section 167 Amortization of Geological and Geophysical Expenditures

You can deduct these costs at 25% the first year, 50% the second year and 25% the third!

  • 167. Depreciation
  • h) Amortization of geological and geophysical expenditures
  • In general

    Any geological and geophysical expenses paid or incurred in connection with the exploration for, or development of, oil or gas within the United States shall be allowed as a deduction ratably over the 24-month period beginning on the date that such expense was paid or incurred.

    Half-year convention

    For purposes of paragraph , any payment paid or incurred during the taxable year shall be treated as paid or incurred on the mid-point of such taxable year.

    Exclusive method

    Except as provided in this subsection, no depreciation or amortization deduction shall be allowed with respect to such payments.

    More about Taxes of investing in Working Interest Drilling programs

    *1031 Exchange Compatible. Section 31 of the IRS Tax Code allows a seller of real estate defer capital gains taxes if they reinvest in a Working Interest Drilling program.

    Here is an excellent article from Investopedia that discusses several advantages.

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    Small Producers Tax Exemption

    The 1990 Tax Act provided tax advantages for the typical investor in oil and gas drilling projects. This Small Producers Exemption allows 15% of any investors gross income for an oil and gas property to be TAX FREE, subject to certain limitations. The tax benefit is not available to large companies or taxpayers who sell oil or natural gas through retail outlets or those who engage in refining crude oil with runs of more than 50,000 barrels per day. It is also not available to investors owning more than 1,000 barrels of oil or 6,000,000 cubic fee of gas average daily production. The Joint Venture’s drilling operations will quality for Percentage Depletion tax benefits. Each investors annual tax return should claim Small Producers Exemption, if applicable.

    Deductibility Of Intangible Drilling Cost

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    When the investor decides which drilling program to invest in, he receives an allocation of IDCs for example 80, 90, or 100%. At this point the investor has options as to when to deduct the IDCs.

    An investor may deduct 100% of the allocated IDCs in the year of investment.

    Or, the investor may choose to amortize the deduction over 60 months, or may elect to deduct part of the IDCs in the year of investment and capitalize and deduct the remaining IDCs over a 60 month period. As you can see, there is great flexibility for the investor.

    The drilling partners obligation is to start, or spud, all the wells within 90 days following the end of the year of investment. This makes the IDCs deductible in the year of investment. At this stage we have touched on intangible drilling costs, functional allocation, and timing of the deduction.

    A quick example may help: cost to drill and complete a well, $1,000,000. Amount of cost that are intangible: 85%. Total intangible drilling cost: $850,000. IDCs allocated to investors: 100%. Total IDCs allocated to investors: $850,000.

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    Intangible Drilling Costs Tax Treatment

    100% Tax Write Off of Intangible Drilling Costs with a Direct Investment in Oil & Gas

    Intangible Drilling Costs are drilling expenses related to labor, fuel, chemicals, hauling, etc. IDCs usually represent 70% to 85% of the cost of a well and can be deducted 100% against taxable income in the first year. For example, if you invested $50,000 today in a project that had 85% of its costs in IDCs, you could elect to deduct $42,500 from your taxable income for 2021. If you are in the top 39.6% federal tax bracket this deduction could save you approximately $14,875 in federal income taxes please speak with your tax advisor for information specific to your situation.

    IDC deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. Aresco has immediate oil investing drilling opportunities for 2022 tax deductions.

    Oil Tax Exemptions And Energy Infrastructure Development

    The list of tax exemptions effectively shows how serious the US government is about developing the nations energy infrastructure. Perhaps most notably there are no income or net worth limits of any kind other than those listed above . Therefore, even the wealthiest investors could invest directly in oil and gas and reap all the benefits listed above. As long as they limit their ownership to 1,000 barrels of oil per day. Hardly any other investment category in the United States can compete with the smorgasbord of tax breaks available to the oil and gas industry.

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    Amortization Of Geological And Geophysical Expenditures

    Location in tax code: 26 U.S.C. § 167

    Amount saved: $1.3 billion between 2016 and 2026

    Oil and gas companies use geological and geophysical surveys in order to locate and assess potential mineral deposits. Rather than amortizing these expenses over the lifetime of the project, independent oil and gas producers are allowed to write off these expenses over two years, and large integrated oil and gas companies can use seven years. This lowers the companies taxable income.

    Deductions For Tertiary Injectants

    Get Unique Tax Benefits by Investing in Oil and Gas

    Location in tax code: 26 U.S.C. § 193

    Amount saved by repealing: $100 million between 2016 and 2026

    This tax deduction allows oil and gas companies to deduct the costs of using tertiary recovery methods, processes in which companies inject fluids and gases into older wells in order to recover additional oil. Companies can deduct the costs in the year they are incurred rather than when the expenditures generate income, thereby lowering their taxable income.

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    Tax Benefits On Investing In Oil And Gas The Basics

    Depreciation Tax Deduction

    The development of natural gas and oil from national reserves helps make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to encourage privately funded domestic oil and natural gas production. Oil and natural gas extraction projects have numerous tax advantages. These tax benefits add to the economics of natural gas and oil projects.

    Compared to services and materials that offer no salvage value equipment and other tangible materials used to complete and produce a well are generally salvageable. Such items are depreciated over a 7 year period using either the Straight Line Method or the Accelerated Cost Restoration System. Equipment in this category would include casing, tanks, wellhead and mast, pumping units, etc. Tangible and completion equipment costs are typically between 20 and 40% of the total cost of the well.

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    Disclosure: Our content is meant for educational purposes only. While its our intent to help you learn more about investing in oil, this article is not intended to serve as investment advice. Please consult your financial, tax or legal advisor before investing in oil or gas, or making any other investment decisions.

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    Invest In Oil And Gas Partnerships

    As you can see, an investment in an oil and gas drilling partnership is a very tax-advantaged investment. Additionally, with global production nearing peak levels while global demand continues to rise, its a mathematical certainty that unless production output dramatically increases, the world will soon witness a global oil shortfall with prices reaching levels not seen since 2008 when oil reached $147 per barrel.

    The tax benefits generated by a direct participation in oil and/or natural gas are substantial. The immediate deduction of the intangible drilling costs or IDCs is very significant, and by taking this up front deduction, the risk capital is effectively subsidized by the government by reducing the participants federal, and possibly state income tax. Each inpidual participant of course, should consult with their tax advisor.

    DISCLAIMER: Viper Capital Partners LLC, is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice. The information on this page is for educational purposes only. Inpiduals should consult their own tax professional for advice. Viper Capital Partners LLC offers no professional tax advice.

    Contact us for Qualified Investor Application For further investment information please contact our Investor Relations Department at:

    333-9174

    Active Vs Passive Income

    Commentary: Canadian oil and gas fueled $493 billion in revenue for ...

    The tax code specifies that a working interest in an oil and gas well is not considered to be a passive activity. This means that all net losses are active income incurred in conjunction with well-head production and can be offset against other forms of income such as wages, interest and capital gains.

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    Other Direct Oil Investing Tax Deductions & Tax Benefits

    Tangible Drilling Costs Capitalized and depreciated over a 7-year period

    Oil and gas drilling equipment such as casing, pump jacks, and wellheads are considered Tangible Drilling Costs . Continuing with the example above, the remaining $7,500 would be classified as TDCs.

    Intangible Completion Costs Deductible in the year they are incurred

    Intangible Completion Costs are generally related to non-salvageable goods and services, such as labor, completion materials, completion rig time, fluids etc. ICCs usually amount to about 15% of the total well cost and provide a great tax benefit.

    Depreciation of Oil and Gas Assets Depreciated over a 7-year period

    While services and materials used during the drilling process offer no salvage value, equipment used in the completion and production of a well is generally salvageable. Items such as these are usually depreciated over a seven-year period, utilizing the Modified Accelerated Cost Recovery system or MACRS. Equipment in this category includes casing, tanks, wellhead and tree, pumping units, etc. Equipment and tangible completion expenses generally account for 15% to 30% of the total well cost.

    Oil and Gas Depletion Allowance Shelter 15% of the wells annual production from income tax

    Deductions For The Depletion Of Oil Shale Deposits

    Location in tax code: 26 U.S.C. § 613

    Amount saved by repealing: The U.S. Treasury would save $840 million between 2016 and 2026 by repealing the depletion deduction for all hard mineral fossil fuels, of which oil shale is one. The amount applying to oil shale alone is unknown.

    Oil shalelocated primarily in Utah and Coloradois expensive to extract and process, is particularly harmful to the environment, and has yet to reach commercial scale in the United States. Despite these drawbacks, companies engaged in oil shale exploration and development can claim a 15 percent depletion allowance on income generated from these activities. Consequently, taxpayers are subsidizing environmentally harmful projects that are not needed, given high-levels of oil production elsewhere in the United States.

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    How The Government Treats Oil And Gas Investment

    Independent Oil and Gas Producers

    The private investment in the development of domestic oil sources is being fortified by the U.S government. Apart from that, the government, as well as the American citizens is searching for methods that will encourage a reduction dependency on overseas oil and reliance on sourcing oil that are domesticated. In order to achieve this goal, marketing personal investment is applicable. Through establishing a tax shelter, the Tax Reform Act of 1986 made gas and oil participation more rewarding to the extent that as much as a hundred percent of the expenditure can be subtracted from an investors tax in the year the well is built. Furthermore, 15% of the current revenue are tax-free. Making oil and gas investments a possible approach for lowering overall tax liability while being able to generate greater income.

    The majority of tax liability was handed from specific investors onto corporations after the implementation of the Tax Reform Act of 1986 which explains why oil and gas participation is a rewarding form of investment.

    Oil & Gas Drilling Expenses

    The IRS considers oil and gas as an asset, that enables investors to amortize the direct expenditures related to drilling that occurred for more than 7 years. Considering that the preliminary tax breaks, and the on-going amortization, oil and gas involvement have tax benefits that are beyond a regular investment.

    Benefits Of Direct Investing In Oil And Gas Wells

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    Accredited Investors* may establish a Direct Working Interest investment with Royale Energy. Royale Energy offers qualified investors an opportunity for direct participation in the drilling of California and Texas exploration and developmental Oil and Natural Gas wells.

    Part of Royale Energys business strategy, includes the lowering of exploration/development risk through the diversification of drilling activities. Royale attempts to lower this risk by inviting Industry Partners and Qualified Investors to participate in the drilling of exploration developmental wells.

    These Direct Working Interest projects include 3 5 wells for diversification, and are offered on a first-come, first-serve basis. As encouraging well sites are identified, they are selected by Royale Energy based upon a variety of characteristics and then placed into groups for your consideration.

    • Investment is 100% Tax Deductible for 2020 Against All Active Income

    • Accomplish a Roth IRA Conversion or a Required Minimum Distribution Without the Tax Liability

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    Tax Advantages Of Oil And Gas Investment

    Investments in oil and gas offer important tax deductions. Although everyone is required to pay income taxes to help finance our government. The government provides tax deductions for situations that contribute to the general welfare of the country. You may have heard that oil and gas work interest drilling programs can help lower your tax bill. Its true, so lets analyze this further. What you will learn here is an introduction to the tax benefits provided by oil and gas operator interest drilling programs. After reading it, you should have a basic understanding of these deductions that can lower your tax bill. In this below article we will discuss about tax advantages of oil and gas investment.

    Myth #: Forget Oil And Gas Investments Alternative Energy Is Where The Opportunity Is

    The truth is that energy demands around the world are steadily growing, and this demand is being met by both in alternative energy growth as well as oil and gas. As energy expert Alex Epstein argues in his book Fossil Future, more oil, gas and natural coal are needed to sustain human flourishing, not less.

    Alternative energy is an exciting, booming industry with tremendous growth potential. Its compelling for environmental reasons. Its also not without tremendous risk and costs, some of which have been borne by taxpayers.

    Some green energy technologies have shown themselves to be winners. The cost of solar and wind power continues to decline. Solar energy has proven itself so effective that solar energy storage is also now a viable industry. Additionally, electric vehicles are becoming increasingly common and desirable, which leads us to our next myth:

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    Myth #: Electric Vehicles Have Decreased The Demand For Gas And Oil Wells

    While energy sources are diversifying in the U.S. and around the world, the demand for oil and gas has not decreased. Oil consumption continues to rise, especially in countries such as China, India and the U.S. As the chart below shows, demand for crude oil has steadily increased since 2006.

    In spite of the rise of electric vehicles, the demand for all kinds of energy has only risen due to population growth and higher quality of life around the world. Even as more people buy electric vehicles, we will always have a demand for oil due to plastics , trucks and heavy equipment that require diesel.

    Equity Direct Participation Programs

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    Equity investments or direct participation programs could be the most profitable way for most investors to participate in, investing in oil and gas. A DPP is a non-traded pooled investment that operates over a several-year time frame and offers investors access to an energy ventures cash flow and tax benefits.

    A DPP typically funds oil and gas development in multiple wells. In the first year, the benefit for the investor is the tax writeoff, which can be upwards of 85% of the investment. After about the first 12 months, when the drilling is complete, investors begin to receive a monthly dividend. The returns can vary from very modest to very profitable, depending on the success of the drilling. 15% of this income is tax exempt, and the remainder is treated as ordinary income.

    After about five years, the well package is typically sold to a larger oil company. The profit from the sale is then distributed proportionately to investors, and returns are treated as capital gains.

    Advantages of direct investments in oil and gas include:

    • Asset class diversification
    • High profit potentials
    • Significant tax advantages

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