“How a century ago, petroleum – what we
call oil – was just an obscure commodity;
today it is almost as vital to human
existence as water.
-James Buchan
“How a century ago, petroleum –
what we call oil – was just an
obscure commodity;
today it is almost as vital to
human existence as water.
-James Buchan
Direct Investing in Oil & Gas Wells
Investing in oil wells is lucrative strategy for avoiding the stock market and often times yields significant tax benefits.
Oil makes the world go around, and that is certainly not going to change any time soon, because there is still a high demand for oil.
Similarly, natural gas is a good source of cooking and heating energy. It can also be converted into electricity and diesel fuel. It is also vital in the manufacture of chemical fertilizers.
While the price of oil has increased over time, the demand for natural gas in the United States has been low since 2012, meaning this could be the best time to buy natural gas and sell when demand increases or supply decreases.
Investing in oil well has its benefits, but you must first understand the risks involved.
So, what does this mean?
A direct oil well investment is also known as direct participation program.
This program is divided into two categories: working interest ownership and limited partnership ownership.
Working Interest Ownership
This is a standard investment channel that was used in the early 1920’s for oil drilling programs. In this channel, you own a piece of the oil well and your obligations are higher than in a limited partnership.
Limited Partnership Ownership
Oil and gas partnership started in the early 70’s. The difference between working interest ownership and limited partnership is that the latter incorporates working capital to give more power to the general partners. Management fees and revenue sharing are calculated once payouts are done.
Tax Benefits of Oil and Gas Investing
80% of investments made is considered intangible drilling and can be subtracted from the money you earn.
Examples of these intangibles are grease, mud, chemicals, and labor. These costs normally take between 60 to 80 percent of the total cost of oil drilling.
For instance, if drilling a well cost $150,000 to drill a well and 75 percent of the cost is considered intangible, investors would get a deduction of $112,500. These costs are deducted yearly.
Moreover, it does not matter if the well strikes or produces any oil, deductions are made as soon as drilling commences.
Intangible drilling costs are regarded as “tax preference item,” hence they are exempted when considering the 1992 Tax Act, Alternative Minimum Tax. 20% of investments made is considered tangible drilling costs.
Tangible costs are directly related to the value of drilling equipment. These costs are also deducted per annum. They can be subtracted if incurred in the first year.
100% of these expenses are subtracted in the year of investment. Companies, through the IRS tax code, Section 179, can subtract the purchase price of equipment bought or funded in the tax year.
There is also “depletion deduction” which allows 10 percent of oil and gas gross income to be tax-free.
Interested in learning more about how you can get involved in oil and gas investments?
Simply fill out the form below.
We will share some projects that are a fit based on your qualifications and interests.
Interested in learning more about how
you can get involved in oil and gas investments?
Simply fill out the form below.
We will share some projects that are a fit based on
your qualifications and interests.
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