What are the Tax Advantages?
Direct participation in a drilling program as a General Partnership, Limited Partnership or a Joint Venture has little bearing on your basic tax considerations in a typical oil and gas drilling program. The cost of the program can be expensed and deducted from your taxable income and capital gains.
Intangible Drilling Costs - (IDCs) 75-85% of your investment will be toward these expenses and are written off your ordinary income and gains in the year the well is drilled. IDCs are the cost of labor, fuel, repairs, supplies, etc that are necessary to the drilling and preparation of the well for production in work done by contractors, including turnkey contract.
Tangible Drilling Costs - (TDCs) 15-25% of your investment will be toward these expenses and are depreciated over a 7 year period using the Accelerated Cost Recovery System. TDCs are well equipment necessary for the same, depreciated over time.
PRODUCTION & LEASEHOLD COSTS:
Depletion Allowance - The current allowance is 15% of every income dollar that your interest produces and is exempt from taxation and is sheltered. The deduction may not exceed 65% of the taxpayer’s total income.
Leasehold Cost - As a Working Interest participant there are normal maintenance costs associated with operating the lease. These are 100% deductible in the year they occur. These costs include pumping costs, well maintenance, mineral severance tax, transportation costs, insurance, tax preparation, filing fees, and all other costs associated with the production of the hydrocarbon.
100% of all dollars invested are written off as a loss against ordinary income.