Tax incentives
Congress has provided tax incentives to stimulate
domestic natural gas and oil production financed by
private sources. Drilling projects offer many tax
advantages and these benefits greatly enhance the
economics.
Intangible Drilling Cost Tax
Deduction
The intangible expenditures of drilling are usually
about 75 to 80% of the cost of a well. These expenditures
are considered "Intangible Drilling Cost, which
are usually 100% deductible during the first year.
Tangible Drilling Cost Tax
Deduction
The total amount of the investment allocated to the
equipment "Tangible Drilling Costs” are
100% tax deductible tangible costs may in most cases
be deducted as depreciation over a seven-year period.
Active vs. Passive Income
The Tax Reform Act of 1986 introduced into the Tax
Code the concepts of "Passive" income and
"Active" income. The Act prohibits the offsetting
of losses from Passive activities against income from
Active businesses. The Tax Code specifically states
that a Working Interest in an oil and gas well is
not a "Passive" Activity; therefore, deductions
can be offset against income from active stock trades,
business income, salaries, etc.
Small Producers Tax Exemption
The 1990 Tax Act provided some special tax advantages
for small companies and individuals. The "Small
Producers Exemption" allows 15% of the Gross
Income (not Net Income) from an oil and gas producing
property to be potentially tax-free.
Lease Costs
Lease costs (purchase of leases, minerals, etc.),
sales expenses, legal expenses, administrative accounting,
and Lease Operating Costs (LOC) are potentially 100%
tax deductible through cost depletion.
