Oil and Gas Tax Deductions: What Accredited Investors Should Discuss With Their CPA

Oil and gas tax deductions are one of the main reasons accredited investors look at direct drilling programs in the first place. Provisions like the intangible drilling cost deduction and the percentage depletion allowance have been part of the tax code for decades, and they can change the after-tax economics of a working interest considerably. The details depend on how a specific offering is structured, though, which is why they're worth a real conversation with a CPA rather than a quick skim of a blog post.

United Exploration, LLC is an independent oil and gas company based in Southlake, Texas. Its management team has participated in the development of more than 250 wells from North Dakota to the Texas Gulf Coast, and the company put together this list of questions accredited investors can bring to their tax advisor before committing capital to a drilling program.

Oil and gas tax deductions are the tax code provisions, including the intangible drilling cost (IDC) deduction, the percentage depletion allowance, and depreciation on drilling and completion equipment, that let investors in oil and gas working interests deduct a large share of their investment, often in the same year it's made.

What Tax Deductions Do Oil and Gas Investments Offer?

Direct participation in an oil and gas well typically involves a mix of deductions rather than a single write-off. The four an accredited investor is most likely to encounter are intangible drilling costs, percentage depletion, depreciation on tangible equipment, and, depending on how the interest is held, the ability to offset active income rather than only passive income.

United Exploration has its own breakdown of how intangible drilling costs work if you want more detail on that piece specifically. The next two sections cover the parts of the equation that get less attention: depletion and the active-versus-passive question.

Because most of these offerings are structured as private placements, they're also generally limited to accredited investors as defined by the SEC, meaning individuals who meet a net worth or income threshold, or who hold certain professional securities licenses. Your CPA can confirm whether you meet that bar before you're asked to sign a subscription agreement.

What Is the Percentage Depletion Allowance, and Do I Qualify?

Percentage depletion lets an investor deduct 15% of the gross income from a producing well each year, or the well's net income if that's lower, for as long as the well produces. It's calculated on a per-well basis and is separate from the IDC deduction, which only applies in the year drilling costs are incurred. The deduction is limited to an average of 1,000 barrels of oil (or the natural gas equivalent) per day, and a taxpayer's total percentage depletion across all properties can't exceed 65% of overall taxable income, with any excess carried forward.

The detail that surprises a lot of investors: percentage depletion isn't tied to what you originally paid for the interest. Because it's based on the well's income rather than your cost basis, it's possible to keep claiming it after your investment has been fully recovered, something cost depletion and standard depreciation don't allow. Percentage depletion is also only available to independent producers and royalty owners, not to major integrated companies that both produce and refine, so it's worth confirming with your CPA that your specific interest qualifies.

Can Oil and Gas Losses Offset My Active Income, or Only Passive Income?

Most investment losses are subject to the passive activity loss rules, which generally limit them to offsetting passive income only. Oil and gas working interests get a specific carve-out. Under IRC Section 469(c)(3), a working interest in an oil or gas property isn't treated as a passive activity if the investor holds it directly, or through an entity that doesn't limit their liability, regardless of whether they materially participate in operations.

That last part matters: the exception depends on how liability is structured, not on how involved the investor is day to day. An interest held through a limited partnership or an LLC that limits the investor's liability generally doesn't qualify, even though it might otherwise look like the same investment. This is a structural detail that's easy to miss when comparing offerings, so it's worth asking your CPA to review the specific entity structure and offering documents together, rather than assuming every "working interest" investment gets this treatment automatically.

What Other Deductions and Structuring Questions Should I Ask?

A few additional items are worth putting on the agenda for a CPA conversation before you invest:

• Bonus depreciation: The 2025 One Big Beautiful Bill Act permanently restored 100% first-year bonus depreciation for qualifying property placed in service after January 19, 2025, which can apply to tangible drilling and completion equipment with a recovery period of 20 years or less.
• At-risk rules: Deductions under IRC Section 465 are generally limited to the amount an investor actually has at risk in the activity, which can affect how much of a loss is usable in a given year.
• Qualified business income: If a working interest is treated as an active trade or business rather than an investment, some of the income or loss may factor into the Section 199A qualified business income deduction, which the 2025 tax law made permanent at 20%.
• Timing: Ask how the timing of your investment and the well's drilling schedule affect which tax year a given deduction falls into.
• State severance tax: Confirm whether the state where the well is located imposes a severance tax, and how it's treated for federal deduction purposes.
• Alternative minimum tax: Ask whether AMT could limit any of these deductions in your specific situation, even though most individual investors are less exposed to AMT than they were before the higher exemption amounts took effect.

Which Is the Best Oil Well Drilling Company to Invest With?

The tax benefits above only matter if the underlying well gets drilled and operated responsibly. A few things are worth checking before choosing an operator to invest alongside:

• Track record: How many wells has the management team actually been involved in developing, and in which basins?
• Industry standing: Is the company a member of recognized industry associations, and how is it rated with organizations like the Better Business Bureau?
• Management experience: How long has the leadership team worked in oil and gas specifically, and what is their background in financing, drilling, and operations?
• Due diligence process: Does the company have a documented process for evaluating prospects before bringing them to investors?

United Exploration's management team has participated in the development of more than 250 wells across basins including the Williston, Powder River, Anadarko, Delaware, and Fort Worth Basins, along with projects in the Haynesville Shale and the Woodbine and Austin Chalk trends. CEO Jacob Jackson and President Morgan O'Neal, who co-founded the company in 2015, bring backgrounds in private equity deployment, well completions, and prospect underwriting to the firm's investment process. United Exploration is also a member of the Independent Petroleum Association of America, the Fort Worth Association of Petroleum Landmen, and the Alternative & Direct Investment Securities Association, and it is registered with the Better Business Bureau.

If you want to see how the company approaches evaluating a prospect before bringing it to investors, its due diligence page walks through that process in more detail.

Bring This List to Your CPA Before You Invest

Intangible drilling costs, percentage depletion, bonus depreciation, and the working interest exception to the passive loss rules are the core pieces of the oil and gas tax picture, but how much of that applies to you depends on your income, how a specific offering is structured, and how your CPA wants to document it. United Exploration works with accredited investors evaluating direct participation in drilling projects across proven basins, and the team is available to walk through a specific opportunity alongside your tax advisor. Call United Exploration at (682) 651-1629 or contact the team online to start that conversation.

This article is for general information and isn't tax or legal advice. Oil and gas offerings of this kind are typically available only to accredited investors, and only pursuant to a Disclosure Memorandum, so confirm your eligibility and review the specific offering terms with your CPA and legal advisor before investing.

FAQs

1. Do you have to be an accredited investor to claim oil and gas tax deductions? 

No. The deductions themselves are available to anyone with a qualifying economic interest in a well. In practice, though, most private drilling partnerships are structured as securities offerings limited to accredited investors, so you'll typically need to meet the SEC's income or net worth criteria to invest in the first place.

2. When do I need to invest to use a deduction in the current tax year? 

It depends on when drilling costs are actually paid or incurred and when the well is spudded, not simply when you wire funds. Ask your CPA how the specific project's timeline lines up with your tax year before assuming a deduction will land where you expect.

3. Are oil and gas tax deductions considered an audit risk? 

Not inherently. They're long-standing, well-documented provisions, and the IRS has specific guidance examiners use when reviewing oil and gas returns. What matters is substantiation: keeping the Schedule K-1s, well-level cost detail, and offering documents your CPA needs to support the numbers on your return.

4. Does the depletion amount on my K-1 match what I report on my return? 

Not always. Pass-through entities often report a "simulated depletion" figure on the K-1, but the amount an investor actually claims can differ based on percentage depletion limits, prior amortization, and other factors specific to that investor. This is another reason to have your CPA calculate it rather than using the K-1 figure as-is.

5. Does investing through an LLC change how these deductions work? 

It can. Entity structure affects both your liability exposure and whether losses qualify for the active-income offset under IRC Section 469(c)(3), so it's worth having your CPA review the specific entity you'd be investing through, not just the type of well or basin.