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.