Oil and Gas Investor Tax Benefits
Tax-advantaged investments aren’t just for the ultra-wealthy. There are opportunities for accredited investors within one particular industry - oil and gas. Yes, the industry took a major hit when oil prices tumbled in 2015.
Things have since stabilized, and after a flushing out of the heavily indebted and inefficient operators, what remains are the more stable companies. Investors now have the opportunity to invest in an industry that still looks undervalued, with many investors avoiding the market all together.
The U.S. actually wants investors to help with funding for oil and gas projects. They have created vast tax incentives for oil companies. It’s an industry where accredited investors can create tax shelters by tapping into large tax deductions not found in any other industry.
There are plenty of deductions for oil and gas investors. Most of the tax deductions afforded to investors are able to be used immediately. These include intangible expenditures like labor, drilling expenses, and chemicals. Called ‘intangible drilling costs’ these are all deductible immediately and can make up 80% of the well cost.
Then there are the ‘tangible drilling costs,’ such as the cost of the drilling equipment, which is also 100% tax deductible but has to be done so over a seven-year period. There’s also depletion expense that will reduce income, but the biggest advantage to investors comes thanks to the 1990 Tax Act. This Act allows oil and gas companies that produce less than 50,000 barrels of per day (and/or less than 1,000 barrels of gas) to exempt 15% of their gross income from federal taxes. No other industry or company can tap into such a tax break.
Is It A Good Time To Invest In Oil?
From an investment perspective, the oil and gas industry hasn’t looked great - at least when you view it from the stock market angle. But, as mentioned above, investing directly in oil and drilling operations provides benefits that go beyond that of the stock market.
Investing directly in oil and gas is one of the best, and relatively unknown, accredited investor opportunities. When oil prices fell in 2015, many investors fled the industry and haven’t looked back. That’s their loss. Oil companies are being ignored, even as worldwide production has been reigned in, helping stabilize prices as supply normalizes. The worst appears over and the U.S. is still on its quest to be energy independent, giving big incentives to oil and gas companies that need to attract investors.
Geopolitical uncertainty will continue to be a driver for independent oil and gas production within the U.S. As a country, the U.S. doesn’t want to be beholden to overseas turmoil. Lest we forget that despite the talk of renewables oil and gas still account for over 60% of energy production in the U.S.
Best Oil And Gas Investments
It might be time to invest in oil. The opportunities in oil and gas industry are somewhat vast, with plenty of oil and gas drilling stocks that investors can buy via major stock exchanges. There’s also oil and gas-focused mutual funds. However, neither of those offer the tax shelter benefits that investing directly in oil and gas wells provides.
But don’t confuse investing in oil and gas wells with royalties. Royalties are paid to landowners. Companies that invest in, and own, land where oil and gas wells operate get paid a percentage of revenue from well production. However, royalty investors get none of the key oil tax deductions.
The best way to capitalize on the oil tax deductions is via working interests and direct participation. By owning an interest in a well, investors get all the major tax benefits - including the 1990 Tax Act - and can even use losses to offset wage income and other capital gains.
Tax advantages aren’t just for the ultra-wealthy. Oil and gas is still a greatly under-appreciated and tax-advantaged investment. This industry can act as a tax shelter for investors. The U.S. government offers direct tax benefits. And the big thing that separates the oil and gas industry tax breaks from other industries is that they are up-front and immediate. Ask us about the partnerships in the lucrative Texas oil fields that we just opened up to investors.
We look forward to speaking with you today and becoming your investment partner. Contact us today.
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