Tax Benefits
A working-interest investment in an oil and gas well is treated differently than most passive investments — here is how that works, in plain terms.
An example investment
On a typical drilling program, roughly 80% of a well's costs qualify as intangible drilling costs (IDCs) — deductible in the year the investment is made. The remaining costs are recovered through depreciation over the life of the well.
The bullets, in full
- — Intangible drilling costs (IDCs) — labor, fuel, site preparation, and other non-salvageable expenses — are typically deductible in the year they are incurred, not capitalized over time.
- — The remaining tangible drilling costs are recovered through depreciation over the productive life of the well.
- — A working-interest holder — unlike a royalty or limited-partnership investor — is treated as directly engaged in the trade or business of oil and gas extraction for tax purposes, which is what allows the IDC deduction to apply.
- — These deductions are governed by Internal Revenue Code Section 263C. Consult your tax advisor to determine how Section 263C applies to your specific situation.