Investment Benefits

Intangible drilling costs (IDC)

Labor, drilling rig time and drilling fluids can be written off within the tax year in which the costs were incurred. IDCs usually account for 80% to 85% of the cost of the total well, and can be written off whether the well is a dry hole or a producer.

Intangible Completion Costs (ICC)

Labor, completion materials, completion rig time and fluids can be written off within the tax year in which the costs were incurred. ICCs usually account for 15% to 20% of the cost of the well, and would be incurred only if a well was a producer.

Depreciation

Equipment used in the completion and production of a well are depreciated over a seven year period utilizing the Modified Accelerated Cost Recovery System. Equipment in this category would include casing, tanks, well head and tree, and pumping units. These expenses usually account for 25% to 40% of the cost of the well.

Depletion Allowance

Once the well is on production, investors are allowed to shelter some of the gross income derived from the sale of the oil/gas through depletion deduction. There are two different types of depletions. Cost depletion is calculated based on the relationship between current productions as a percentage of total recoverable reserves. Statutory or percentage depletion is subject to several qualifications and limitations. This deduction will generally shelter 15% of a well’s annual production from income tax. For wells that produce 15 barrels or less per day, depletion percentage can be up to 20%.

Lease Operating Expenses (LOE)

This expense covers the day to day costs involved in a well operation. LOEs are usually deductible in the year occurred. 

Tax benefits generated by direct participation in oil and gas operations are material. The immediate deduction of the IDCs are very significant and by taking this upfront deduction, the risk capital is effectively subsidized by the government by reducing the investor’s federal and state income taxes.