Tax Advantages of Oil and Gas Partnerships
A number of significant tax advantages for oil and gas partnerships exist for qualified investors. NorthDakotaOilBoom.com urges all investors to review the tax advantages for oil and gas partnerships carefully. When determining if the tax advantages for oil and gas partnerships are right for you, seek the advice of your tax attorney or CPA to determine how these tax benefits will impact you.
The many tax advantages for oil and gas partnerships listed below are for educational purposes only. This information about tax advantages for oil and gas partnerships should not be construed as tax Advice. The IRS website has detailed information regarding the available tax advantages for oil and gas partnerships.
INTANGIBLE DRILLING COST (IDC)
The largest expense you will in oil and gas partnerships is for drilling, testing, and completing the oil or gas well. Thanks to the tax advantages for oil and gas partnerships, these costs – 60-80% of the overall cost of drilling – can be deductible. Allowed intangible drilling deductions may include expenses for renting drilling rigs as well as the wage, fuel, and supply costs incurred in the process of drilling, testing, and completing the oil or gas well. The investor may choose to deduct the expenses in a single year or amortize the cost over 60 months.
The tax advantages for oil and gas partnerships include the recovery of the cost of investment made by oil and gas partners for equipment through depreciation over seven years. The investor can use either accelerated depreciation and straight line depreciation based on which would provide the best advantage.
Investors receive tax advantages for oil and gas partnerships that include a percentage depletion – usually 15% – of the gross income produced by the well. The percentage depletion deduction is in addition to the standard depletion deduction available to all producers. For certain wells meeting marginal production guidelines set by the IRS, percentage depletion deductions can be as high as 25% of the gross income produced by the well.
GEOLOGICAL & GEOPHYSICAL DEDUCTIONS
One of the relatively new tax advantages for oil and gas partnerships is the deduction allowed by the IRS is for certain costs related to the geological and geophysical analysis associated with the development of the well. These costs can now be deducted over a 24-month period.
CONVERTING FROM GENERAL PARTNER TO LIMITED PARTNER
As a general partner, the oil and gas partnership investor’s share of net income or loss constitutes earnings from self-employment. The tax advantage of oil and gas partnerships is that the likely losses from the drill year (due to intangible cost deductions) can be used to offset self-employment income. Once the well becomes profitable, a general partner can convert to a limited partner and no longer be subject to self-employment taxes.
ALTERNATIVE MINIMUM TAX REDUCTION
The tax advantages of oil and gas partnerships include potentially reducing each partner’s Alternative Minimum Tax (AMT) liability through the ability to deduct up to 40% of excess intangible drilling costs.
PASSIVE ACTIVITY EXCEPTION
Thanks to the tax advantages of oil and gas partnerships, these investments are specifically exempt from being defined as passive activity, and therefore, all income from the well is non-passive.
The tax advantages for oil and gas partnerships referenced above are for information purposes only.
This information is not to be used for TAX ADVICE. Please contact your tax professional and or attorney for more information to see how these tax advantages for oil and gas partnerships may apply to your situation.