While there are many types of investments sophisticated investors can make, the most sophisticated of investors investing in oil and gas, and for good reason. There are several benefits of investing in oil, ranging from the incredible tax advantages to the lucrative income. Investing in oil also diversifies an investment portfolio, creating a wealthy and well-rounded investor.
Benefits of Investing in Oil
The main benefit of investing in oil likely rests within the tax advantages. Drilling costs are expensive and are divided into intangible and tangible costs, as are other investments. With oil investments specifically, intangible costs are the majority of expenses and are 100% deductible. This is regardless of whether the well produces oil, which lessens the risk of the investment if oil is not found and heightens the rewards if oil is found.
Investing in Oil – Royalties
If one actually owns the land where oil and gas wells are drilled, it can be very profitable. This is defined as a royalty and receive a certain percentage of all income generated from the wells on their property. When investing in oil through royalties the landowners assume no liability, but should keep in mind that they are not eligible for the same tax benefits as other types of oil investments.
There are several other tax benefits as well, including small producer tax exemptions, an alternative minimum tax, and deductible lease costs. What may be most beneficial to those investing in oil, as opposed to another type of investment, is that working interests within oil and gas is considered an active income. Any net losses can be offset against other income, increasing the chances of high earnings even further.
The benefits of investing in oil are perfect for the wealthy investor. Oil investments receive tax benefits that are not found elsewhere, as well as profits that are not equaled through other endeavors. When investing in oil, the benefits greatly outweigh the negatives that may exist.