Drilling for oil in the U.S. continues to be a boom. However, finding opportunities isn’t as easy as it once was. The stock prices of many publicly-traded oil companies have not returned to pre-2014 oil crash levels.
Still, there are smaller oil well drillers that survived the oil crash of 2014 and are now stronger than ever. And the tax benefits of investing in oil are also stronger than ever. The overhaul of the U.S. tax code last year left in place all the key tax breaks provided to investors owning a direct stake in oil wells.
Directly investing in oil wells remains one of the best tax advantaged investments around, especially as oil gets closer to $100 a barrel. Accredited investor opportunities in the current market still include the likes of real estate and the stock market, but if you’re looking for tax-deductible investments, the best place to look is oil drilling.
Shale companies drilling prolific wells in the fast growth Texas areas, including the Eagle Ford shale and Permian Basin, are still investing heavily in finding new wells. There are still opportunities to be found.
Oil output in the U.S. is at all-time highs, hitting 10 million barrels a day and closing in on the dominance of Saudi Arabia and Russia. This presents accredited investors with a unique opportunity.
U.S. Oil Stronger Than Ever
The U.S. has managed to take global oil market share as the powerhouses, Russia and Saudi Arabia, have cut supply. Venezuela’s oil production has fallen off a cliff over the last three years, further opening the door for U.S. oil production. Then there’s the near-term catalyst that can give U.S. producers another boost, Iran. This is a top 10 oil producing country, but it’s facing sanctions by global superpowers that threaten to put pressure on the oil supply in the Middle Eastern country.
The U.S. is more than making up the slack. Oil being drilled from U.S. shale plays has more than offset the international decline. With more declines in international oil production expected, the U.S. is poised to continue increasing production.
One catalyst for U.S. oil drillers is the continued infrastructure investments. U.S. oil investments like pipelines will help bring even more supply to the global market in the future.
The Benefits Are Real
The tax benefits afforded to oil investors are some of the best among all investment opportunities. The top three reasons for oil investing among accredited investors include three very appealing tax benefits. The first is probably the most exciting, the depletion allowance for small producers. If you invest in an oil well that produces less than 50,000 barrels of oil a day, the U.S. tax code will allow you to exclude 15% of your gross oil income from taxes. That’s not a deduction against taxable income, but an outright exclusion.
Then there are the drilling costs. The cost of drilling and producing the well can be used to reduce oil income. Along those lines, the second major tax benefit is intangible drilling costs. These costs make up the majority, over two-thirds, of the typical cost to drill and produce a well. Included here are labor, chemicals, and other expenses. All these expenses are 100% deductible in the year incurred. Investors can actually get the benefit of these intangible costs in the first year even if the well doesn’t start producing oil.
The third tax benefit is being able to reduce the tangible drilling costs. This is direct costs of oil drilling. Investors can use the cost of equipment to reduce income, to the tune of 100% of the cost, depreciated over several years.
Accredited Investors Have A Powerful Advocate
The U.S. government supports the development of oil independence. When it comes to investing in oil wells, it doesn’t matter how much money you have, in fact, the more the better. There are no limitations on income levels when it comes to taking advantage of the tax benefits oil well investing.
The U.S. government offers enticing tax breaks to convince investors to buy directing into wells and small oil producers. The drive to become energy independent is real. And U.S. oil companies are expected to keep churning out oil. New technology and innovations are making well drilling quicker and more efficient.
Sure, you can “invest” in oil with stocks or mutual funds, but this isn’t direct oil well ownership. Thus, you don’t get the tax advantages. The best investment opportunity for accredited investors remains in oil wells.
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