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Independent Oil and Gas Producers

Most Americans would like the country to be less dependent on foreign souces of oil. As a result, the tax laws of the U.S. encourage exploration and development of domestic sources of oil. Most Independent Operators, which drill the majority of the Nation’s wells, provide direct participation investors with cash flow and tax advantages via oil and gas programs.

How the government treats oil and gas investing

The Tax Reform Act (Act), enacted in 1986, made significant changes to the tax laws as they pertain to oil and gas investments. In general, the Act shifts more of the tax burden from individuals to corporations.

Intangible Oil & Gas Drilling Costs

Intangible Development costs of domestic drilling programs may be expensed or capitalized at the discretion of the individual investor. Furthermore, intangible costs may be deducted by the investor in the year the well is drilled.

Tangible Oil & Gas Drilling Costs

At this time, the drilling of an oil and/or gas well is considered production of an asset. The tangible costs associated with drilling a well are capitalized and amortized over a seven (7) year period, beginning with the month in which they are paid.

Oil & Gas Production Depletion Allowance

• Independent producers and royalty owners can claim percentage depletion of 15% on domestic production. Depletion costs may be recovered using whichever of two (2) methods provides a higher deduction, cost depletion or percentage depletion.

• Percentage depletion for oil and gas properties is limited to independent producers and royalty owners for daily production up to 1,000 barrels of crude oil or an equivalent amount of natural gas. However, percentage depletion cannot exceed 65% of overall income.

Breakdown of Deductions*

Cost Classification	Tax Treatment	Percent Estimated
Intangible Developmental	Expensed year incurred	50%
Tangible Developmental	Depreciated over 7 years	25%
Leasehold	Depreciated over life of well	10%
Organization & Due Diligence	Amortized over 60 months	5%
Commissions	Amortized over 60 months	10%
*Tax advantages will vary with each program

Potential Rewards of Investing in Oil and Gas Drilling Projects

While invests risk the principal funds that they risk associated with investing in oil and gas programs, there are substantial benefits as well. In addition to the tax benefits outlined above, informed and selective investors also have the potential to recover their initial investment and continue to receive cash distributions.