Tax Advantages

Loop Hole?

NO, this not a loop hole! The United States Congress has provided tax incentives to stimulate investment into domestic oil and natural gas production. Our country is heavily dependent on foreign oil which costs our government money to secure therefore they placed tax benefits in the Tax Code for participation in oil and gas ventures that make them one of the best tax advantaged investments.

How Does It Work?

The Tax Reform Act of 1986 introduced the concept of "Passive" -vs- "Active" income. The Act prohibits offsetting of losses from Passive activities against income from Active activities (i.e. salary, bonuses and draws). The good news is; The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" activity. Therefore, deductions can be made directly from your Active Income. Typically this is the most difficult type of income in which to receive significant tax breaks.

How Much Do I Save?

Eventually you get to write the entire investment off of your ordinary income, however what most investors like is that the IDC's (Intangible Drilling Costs) which are usually 70% to 80% of the total investment are deducted the FIRST YEAR.

For example, a $50,000 investment would have approximately $35,000 to $40,000 in tax deductions in the first year (refer to Section 263 of the Tax Code). So if you pay 35% in Federal and State taxes combined then you would save approximately $12,000 to $14,000 off your taxes the first year. This obviously also lessons the "at risk" dollars in the venture.

You MUST consult your tax advisor as to exactly how this will impact you. This page is simply for illustrative purposes only.