Tax Advantages of Investing in Oil & Gas
Participating in domestic oil and gas development strengthens U.S. energy independence while offering meaningful tax advantages for qualified investors. To promote exploration and production activity, the U.S. government offers a variety of tax incentives designed to stimulate domestic energy growth. These incentives may substantially improve returns, making oil and gas investments a compelling component of a diversified portfolio.
Understanding Active vs. Passive Income
The Tax Reform Act of 1986 established rules differentiating between active and passive income. Under this legislation, investors cannot use passive losses to offset active income. However, a working interest in an oil and gas project qualifies as an active investment, which may permit associated losses to offset active income sources including wages, business income, interest, and capital gains. This exception gives investors a distinctive opportunity to reduce taxable income through strategic energy participation. This means an investor in the highest tax bracket could offset a significant portion of their investment through tax savings in year one, substantially reducing the effective capital at risk.
Key Tax Incentives Available to Oil & Gas Investors
Intangible Drilling Costs (IDC)
Expenses related to non-physical aspects of drilling, including site preparation, labor, chemicals, and rig rental, are 100% tax deductible in the year incurred.
Tangible Drilling Costs (TDC)
Physical equipment and assets used in drilling operations, such as casing, tubing, tanks, and wellhead equipment, can be depreciated over their useful life, typically five to seven years, providing ongoing tax benefits.
Depletion Allowance
Investors may deduct 15% of gross production revenue as a depletion allowance each year, representing the natural reduction in the well's reserves over time.
Small Producers Tax Exemption
Established under the 1990 Tax Act, the Small Producers Tax Exemption permits eligible investors to exempt 15% of their gross income from oil and gas properties from federal taxation.
This benefit applies to individuals and small producers, excluding large-scale refiners, retailers, or entities producing more than 1,000 barrels of oil or 6 million cubic feet of gas per day. Trilateral Drilling Partners, LLC partnerships are structured to qualify for these benefits, and investors should consider claiming this exemption if eligible.
Detailed Overview: IDC and TDC Deductions
Intangible Drilling Costs
Intangible costs encompass expenditures that do not result in physical assets but are essential for drilling operations, including land access, mud services, testing, mobilization, and inspection. These costs can represent a substantial portion of a project's capital and are typically 100% deductible in the year incurred, delivering immediate tax relief. In our program, up to 92% of the total investment qualifies as Intangible Drilling Costs, providing a substantial first-year deduction against active income.
Tangible Costs
Tangible costs pertain to physical, long-term assets utilized in drilling and production. These assets, including pipes, tanks, and casing, are depreciated over their useful life, generally five to seven years. Proper allocation of these costs enables investors to accurately project returns and manage long-term tax liabilities.
Disclaimer
Investors should consult their personal tax advisors for guidance tailored to their financial situation. This overview does not constitute tax advice. Pursuant to IRS Circular 230, any tax-related discussion in this document is not intended or written to be used for the purpose of avoiding tax penalties or promoting, marketing, or recommending any transaction.
Ready to Take the Next Step?
Contact Us Today
We offer institutional-quality energy investments through advanced multilateral drilling, prioritizing efficiency, compliance, and sustainable results. Ideal for investors seeking strategic energy diversification.
Get In Touch