- July 5, 2019
Oil and gas is one of the most lucrative investment options available to high networth individuals and accredited investors. Investing in oil and gas entails numerous benefits with the highlights being potentially sustainable ROI, diversification of portfolio, and massive tax breaks. Many investors, however, aren’t fully aware about the perks of oil and gas investment opportunities. So, to help clear the smokescreen, we answer five commonly asked questions about the tax benefits of investing in oil and gas. Read on.
1. What are the tax benefits of oil and gas investments?
Intangible drilling costs, tangible drilling costs and lease cost are among the top three tax benefits of investing in oil and gas. These benefits apply to both small and large producers of oil.
2. What are the tangible and intangible drilling costs?
All the costs incurred for buying intangible drilling equipment such as labor, chemicals, grease, mud and other items are considered intangible drilling costs. On the other hand, tangible drilling costs include the costs incurred for the purchase of actual drilling equipment. Both tangible and intangible costs are 100% tax deductible.
3. Do oil and gas investments have any unique benefit?
Oil and gas investments offer a unique tax benefit wherein net losses are considered active income for offsetting against other forms of income. According to the US tax code, any working interest of an oil and gas well cannot be considered as a passive investment or a passive activity. It must be considered as an active income only, and any losses incurred in oil and gas production can be offset against wages, interest, capital gains and other forms of income.
4. What is the alternative minimum tax?
According to the US tax laws, the Alternative Minimum Tax (AMT) is used for calculating income tax after adding all the tax preferences into the adjusted gross income. For instance, all the excess intangible drilling costs for an oil and gas well are considered as ‘tax preferences’ and are thereby exempted on the alternative minimum tax return.
5. Are there any lesser known tax benefits?
Yes. Enhanced recovery credit is a lesser known tax benefit of investing in oil and gas. Over time, oil wells dry up from activities such as drilling. Once the oil in a well decreases beyond a certain level, it becomes difficult to extract that oil due to low pressure. In such cases, to encourage the extraction of the oil present in the lowest level of the well, the government offers an enhanced recovery credit of 15% to oil producers extracting oil left in the lowest levels of an oil well.
Lately, the US emerged as a global leader in the production of total petroleum products and dethroned other top oil producers such as Russia and Saudi Arabia. The government is heavily focusing upon improving the national energy infrastructure. States such as Texas, North Dakota, California and Alaska are a few among the top producers of oil in the US. If you’re looking to invest in energy projects of Texas and North Dakota, look no further than Fig Tree Capital Ventures. To learn more about potential oil and gas investment opportunities, fill out our contact form or simply call +1-866-304-9194.