Why Qualified Investors Are Choosing Oil & Gas

While environmentalists and industry enthusiasts scrutinize and monitor oil and gas investment companies, sophisticated investors have a different view of the industry. Oil and gas companies have become popular over the years for reasons that make this particular investment unique above all other forms of investments.​Here are four reasons why qualified investors are choosing oil and gas companies.

Tax IncentivesSerious investors are always in search for the best return on their investments. One way to do this is by looking for opportunities that offer tremendous tax incentives. The US government continues to play a significant role in providing tax exemptions and benefits for investors and producers to foster the production of oil and gas in the country. The tax code does not have any other investment venture that offers robust tax advantages than oil and gas investment. The US government hopes that by providing generous tax benefits to investors, domestic production of oil and gas will increase, thus curbing reliance on foreign fuels.If you would like to invest in oil and gas, you are set to enjoy significant tax benefits and exemptions such as the ones discussed below.

• The Incentive for Tangible Drilling Charges

Drilling costs include equipment costs, which depreciate with time. However, if you invest in the industry, you enjoy 100 percent incentive when purchasing drilling equipment. Notably, intangible drilling costs are usually written off when you incur them in the first year of operation. However, the drilling process has to be active by March 31st of the preceding year. This incentive is vital to oil gas investors because intangible costs take about 80 percent of drilling. Examples of intangible drilling costs include supplies, mud drilling, employees, fracking process, chemicals, and crew expenses.Both tangible and intangible oil and gas tax deductions cover about 90 percent of drilling costs. This means you are relieved of most of the drilling costs. Moreover, you will still receive incentives even if you don’t extract any oil from the ground. Note that there is no relationship between oil production and drilling deductions.

• Depletion Allowance

As an oil and gas investor, you are exempted a taxation amount of approximately 15 percent of the total income accrued from gas and oil wells. For instance, if you receive $20,000 from your oil and gas investment, $3000 of that amount is tax-free.]To qualify for this tax benefit, you must not produce more than 50,000 barrels of oil or 6 million cubic feet of gas per day. Depletion allowance takes into account depletion of gas and oil at a particular site for a given period.

• Active and Passive Income Deductions

In the US, the Tax Reform Act of 1986 stipulates that taxpayers should not offset losses arising from passive income against active income. Keep in mind oil and gas is described as active income. What this means is investors who incur losses from the oil wells are allowed to deduct such losses from capital gains, business income, salary, interest income as well as other income sources.

• Alternative Minimum Tax

This tax benefit deducts additional development and intangible drilling costs that you have incurred. These deductions are referred to as a tax preference item.

• Tax Benefits for Marginal Wells

A while back, the US Senate and the House of Representatives passed a law that gives investors tax credit of $9 a day, for a single well for both gas and oil wells. Notably, a marginal well can pump an aggregate of 15 barrels of oil or 90,000 cubic feet of gas in a single day. Oil and gas wells account for approximately 23 percent and 10 percent of total oil and gas production, respectively. The government approved the tax bill because the number of permanent wells in the country continues to grow. This was a move to protect marginal wells.

• Recovery Credit

As drillers recover oil from the field, it becomes complicated and expensive to collect oil since the pressure inside the well reduces over time, consequently slowing down oil production. Note that these wells still have oil; the problem is that pressure is insufficient. For this reason, the government continues to encourage drillers to use different oil extraction techniques to collect the remaining oil. As an investor, you are awarded a tax credit of 15 percent. If you have a drilling company that incurs costs associated with recovery activities, you are allowed to claim recovery credits. Also, you may qualify for a tax credit if you extract oil and gas through carbon monoxide, steam or chemical.The interesting thing about the oil and gas tax benefits discussed above is that they have very few limits. The only notable limitation is the small producer limit. This means that tax credits and exemptions from investing in this industry are the best options even for high-net-worth individuals. As an investor, you can earn a lot of profit if you own at most 1000 barrels of oil per day, and you can be exempted from most of the tax credits and exemptions discussed above.

Return on Investment
​Sophisticated investors understand investing in investing in oil and gas has high return investments. Currently, however, there is an oversupply of the oil and gas although the industry still provides a window of investment opportunities for accredited investors, and it is expected to remain constant for some time. Oil and gas investments continue to offer stable returns when compared to other types of investments, where most of the profits are paid out to investors.

Long-term Passive Income Generation
​Oil and gas allow potential investors to tap into a financially lucrative venture with long-term high yield return on investments. Furthermore, you do not need to be actively involved in the business. Plus passive income attracts low taxation.

Asset Diversification
​The workings of the oil and gas industry have always been different from the general economy. When the economy is not performing well, your business can experience huge financial losses, but the demands and supply shifts in the economy do not affect the prices of oil and gas. In fact, as the prices for natural gas and oil rise, their stocks increase simultaneously. Thus, investments in the oil and gas sector can protect you against slowdowns in the economy.

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