The tax benefits of joint venture oil and gas investments are plentiful:
Congressional Incentives: Congress provides tax incentives to stimulate domestic natural gas and oil production financed by private sources.
Intangible Drilling Costs Tax Deduction: Oil and gas projects are labor intensive, so a significant portion of the expenditure is considered Intangible Drilling Costs (IDC), which is 100% deductible during the first year. For example, a participation of $100,000 could result in approximately $80,000 in tax deductions for IDC in the year of investment. The remaining $20,000 of tangible costs may be deducted as depreciation over a seven year period. In addition, all oil and gas revenues qualify for a depletion allowance for the life of the well.
Active vs. Passive Income: The Tax reform Act of 1986 prohibits the offsetting of losses from Passive activities against income from Active business; however, it 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.
Alternative Minimum Tax: Prior to the 1992 Tax Act, working interest participants in oil and gas joint ventures were subject to the Alternative Minimum Tax to the extent that this tax exceeded their regular tax. The recent Tax Act exempted Intangible Drilling Cost as a Tax Preference Item.
Tax Example*: Oil and gas revenue qualifies for a depletion allowance, which effectively reduces taxes on distributions by 15-20% for the life of the program (15-20 years). Anticipated distributable income projections of $10,000 in the first year of production, provides return of after tax capital in 4.5 years, and a total program return of better than 3:1 for the life of the program.
|Intangible Drilling Cost Deduction 80%||$80,000|
|Tax Savings 49% NYC Taxpayer||$39,200|
|Completion Costs First 18 Months||$80,000|
|Intangible Completion Costs Deduction 80%||$64,000|
|Tax Savings 49% NYC Taxpayer||$31,360|
*Each Joint Venture participant’s tax liabilities are different; consult with your personal tax advisor regarding the potential benefits of oil and gas joint venture investments. The example above assumes an individual NYC taxpayer in a 49% tax bracket.