Tax Benefits of Investing In Base Oil and Gas

Investing in various commodities is all about the various benefits you want to gain from the same investment. Although, for sure there are indeed a few risks involved, but those can be easily neglected as the return and the benefits are enormous.

When you decide to invest in any commodity like base oil commodity or the natural gas, you also need to know that there are various benefits in the same. One of the best benefits you can get is the tax benefits out of these investments. Here are those –

1.      The cost reduction of the tangible cost – There are a few costs involved in the oil and gas investments and one of these are the tangible costs related to drilling. These costs include the equipment costs used for drilling, and the best thing is, the investors enjoy up to 100% deduction of these costs.

2.      The cost reduction of the intangible cost – The intangible expenditures of drilling such as the labor, chemicals, mud, grease, etc. are usually about 65% to 80% of the cost of a well. These expenditures are considered “Intangible Drilling Cost (IDC)”, which is 100% deductible during the first year. This is indeed a great tax benefit for the investors.

3.      The various income sources – When you are investing in the oil and gas commodity, there are various passive and active incomes that you can enjoy as an investor. 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. 

4.      The tax exemption benefit – If you are a small scale producer or an investor in the oil and gas commodity, then you can enjoy the benefit of tax exemption. This benefit is known as the “Percentage Depletion Allowance”, which is specifically intended to encourage participation in oil and gas drilling.  If you are a large producer or an investor who produce more than 50,000 barrels per day, then this benefit cannot be enjoyed by you. The “Small Producers Exemption” allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.

Things to Consider Before Investing In the Commodity Market

Investing in the commodity market involves a lot of risks and there are many things to consider before making any investment. Because – your money is on stake and nobody likes to lose money. As a commodity investor, you don’t have to buy 100s of units of commodities and find out the faults in them. For example you don’t want to discover the corn you’ve purchased is of poor quality or the cattle you have bought are deceased and of no use. This is why you need to take a few things into consideration before you invest in the commodity market.
There are many options for commodities – Dominican commodities, Asian commodities and so on. You must make sure that before you are investing in any of these, you are well aware of the things below –

1. It is a risky affair – Commodity investment is a risky business. These risks are quite unpredictable and can happen anytime for example – the weather pattern, world conflict, natural disaster, epidemics and so on. For instance, if you are investing in the oil or gas commodities, your investment and profit for the same can be affected by world conflicts. Investing in the corn or grains commodities can be affected by natural disaster or weather pattern and so on.
2. Know in and out about your commodities – If you are investing in a particular commodity and you don’t have proper knowledge for the same, it can affect your investment. Whether you are investing in commodity futures or in oil or natural gas and such, you must know whether that particular commodity will provide you better returns or not. For example, investing in gold or platinum is a better option because these commodities are always in demand.
3. Stay informed – Just investing and putting your money doesn’t end the job. The process is a lengthy one and you must know each and every happening in the commodity market. A good investor is always well-informed and well-aware of what is going around in the market. If you want to be a gainer, learn the technique of being a lurker.
4. Know the basic Principles of economy – You must know the basic economy principles involved with the commodity market. Lower supply equals higher prices. To find out any major disruptions in supply such as diseases and health scares, follow livestock patterns and statistics. Read the latest headlines and analysis of the commodity market. Know what you’re dealing with.