Tax Savings

 1. Intangible Drilling Cost (IDC) Tax Deduction
The intangible expenditures of drilling (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. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (See Section 263 of the Tax Code.) 

2. Intangible Completion Costs (ICC):
As with IDCs, these costs are generally related to non salvageable completion costs, such as labor, completion materials, completion rig time, fluids, etc. Intangible completion costs are also generally deductible in the year they occur, and usually amount to about 15% of the total.

3. Depreciation: 
As opposed to services and materials that offer no salvage value, equipment used in the completion and production of a well is generally salvageable. Items such as these are usually depreciated over a seven year period, utilizing the Modified Accelerated Cost Recovery system or MACRS. Equipment in this category would include casing, tanks, well head and tree, pumping units, etc. Equipment and tangible completion expenses generally account for 25% to 40% of the total well cost.

4. Depletion Allowance: 
Once a well is in production, the participants in the well are allowed to shelter some of the gross income derived from the sale of the oil and/or gas through a depletion deduction. This deduction will generally shelter 15 per cent of the well’s annual production from income tax.

The general information on this site is not intended to be individual tax advice. You should contact your personal tax advisor concerning the current tax laws and their applicability and effect on your personal tax situation.

< BACK TO MAIN PAGE