Oil and gas represents an investment opportunity that delivers potentially high returns to investors, and a number of exclusive tax advantages. The U.S. government is encouraging domestic production of oil and natural gas to lower the dependence on imported sources, making domestic oil and gas investment programs an even more lucrative option for qualified investors. Although there are several tax benefits associated with oil and gas investments, the perks vary depending upon the type of investment. Continuing on the subject, this blog post discusses the main types of oil and gas investment opportunities and their tax benefits.
Limited partnerships for energy investments limit the liability, to a certain extent, of the investor. Investors get tax advantages on a pass-through basis, which avoids double taxation. The tax amount an investor has to pay depends on the investment made and revenue generated from the partnership. The investment involves a lot of risk, and therefore, the Securities and Exchange Commission requires most investors in energy partnerships to be accredited. Investors can get a considerable deduction in the first year of the investment and 15% depletion allowance on income for the life of the well.
Owners of the land where oil and natural gas reserves are found and drilled are entitled to receive royalties that may range between 12-20 percent of gross production. These royalties are required to be reported and landowners get a tax break only if they actively invest in the production or in any other manner.
Stocks and American Depositary Receipts
Investors can put their money in companies that are drilling oil and natural gas in the form of stocks and American Depositary Receipts (ADR). Most oil production companies are public limited entities and buying their shares is a simple procedure. Although the risk involved in stocks and ADR is different from direct participation, investors do not qualify for any tax breaks in this case.
Investors need to report the income generated from working interests on Schedule C of 1040 Form, and the amount is also subject to self-employment tax. Working interests, however, are eligible for a number of tax breaks and investors usually earn the amount that exceeds the taxable wage base.
The oil and gas sector can provide lucrative returns and great tax saving opportunities, provided you partner with an experienced investment partner. If you wish to learn more about oil and gas investments or find out whether you qualify to invest, get in touch with one our investment consultants. Simply call (866) 304-9194 or fill out our contact form and one of our representatives will reach out to you, shortly.