Most of you out there are aware that you can reduce your tax bill by contributing to your 401(k) plan, deductible IRA, and Health Savings Account, but do you know about the tax advantages of investing in oil and gas? I am surprised by how many people aren’t aware of the huge tax benefits and total returns that can be available from this unique asset class.
Under Tax Code Section 469(c)(3)(B) investors in a domestic oil and gas drilling program can deduct the intangible drilling costs (IDCs), which are often 40%-90% of the invested amount in the first year. A good diversified oil and gas investment will have a bunch of different wells to spread out your risk, similar to a mutual fund that owns many stocks.
Horizontal shale drilling and hydraulic fracking has changed the game, and is increasing productivity and reducing costs for this incredible investment opportunity. 30 years from now, your grand kids will say, “What did you do with your money when money was so cheap and the oil boom was just getting started?”
In 2012, it cost $12 million dollars to drill a well up in the Bakken, now it is under $8 million to drill the same well!
As a General Partner in an oil well, you can deduct your Intangible Drilling Costs (IDCs) from your ordinary income! Since we’re coming up on the end of the tax year, why look look at oil and gas a a good way to reduce your taxes and increase your net worth?
Be careful, and do your research. There are lots of oil drillers that have sprung up in recent years, and many of them have taken on too much debt, and won’t be able to survive for long if oil stays below $80 for a prolonged period of time. Try to find a driller that is not only drilling in the Bakken, but that also has interests in other hot spots like Piceance basin as well. Also, seek to find a company that will give you the mineral rights to the well. This is where the real value is at, and after you take the initial 200,000 barrels out of the well, you can sell your interest for the remaining 300,0000 barrels of recoverable oil for a discounted price, and do the whole thing all over again. This is true value! Own the mineral rights, and you control your exit strategy!
Remember, The oil in the Bakken is not a new find, it is a 100 year old oil field. Back in 1900’s-1940’s, it was a shallow, vertical drilling, like into a reservoir. It was like sticking your straw down into a milkshake. Once you got the oil out of that one spot, you pulled out, sealed the hole, and moved on. Now, 70 years later, technology has increased that allows you to drill deeper, drill horizontally, micro-fissure, and frack the well. Eco-Pad drilling has increased production as well. Now, with one oil rig, you can drill 4 wells sequentially. Awesome!
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