Tax Implications of Directly Owning Oil & Gas Assets
By Eckard Enterprises
As real estate enthusiasts, you are well-acquainted with the importance of sound financial planning, asset diversification, and tax-efficient strategies. Now more than ever, oil and gas remain integral to global energy consumption. While commodity price fluctuations introduce volatility, they can also create significant profit potential during upswings. Oil and gas investments present a unique opportunity to not only generate long-term revenue streams but also leverage substantial tax benefits.
Here at Eckard Enterprises, we provide opportunities to own energy assets to qualified individuals. Today, we’d like to introduce an asset class known as working interest, which offers both the potential for high returns and major tax advantages.
What is Working Interest?
Unlike mineral rights owners, working interest owners are directly involved in the drilling of oil & gas wells. They receive a much larger percentage of the proceeds from the sale of oil & gas, but are also on the hook for any cost overruns that exceed what is outlined in the AFE, or Authority for Expenditure. This is a document produced by the oil company that outlines the estimated costs of drilling a well. With horizontal drilling, the risks of unsuccessful wells are much lower than they used to be. However, it is important to recognize that there is a significantly higher degree of risk present in working interest investments compared to mineral rights.
Key Tax Advantages for High-Income Earners:
One of the most compelling aspects of oil and gas investment is the range of tax incentives available:
Intangible Drilling Costs (IDCs): These costs (e.g., labor, chemicals, equipment rentals) can be deducted in the year incurred. This is important because these types of costs typically constitute 65-80% of the total drilling cost. For example, a $100,000 investment where 70% qualifies as IDCs results in a $70,000 deduction. A 35% tax rate translates to $24,500 in tax savings.
Tangible Drilling Costs (TDCs): Equipment such as rigs and pipelines is capitalized and depreciated over time.
Depletion Deductions: Investors can deduct depletion expenses related to the reduction of a well’s production capacity.
Bonus Depreciation: As of 2024, 60% of the purchase price of qualified assets is eligible for immediate deduction under Section 168(K).
These tax incentives make working interest investments particularly attractive for high-income earners seeking to offset substantial taxable income.
Educating Yourself on Oil & Gas:
For investors seeking diversification outside of traditional markets, oil and gas ownership provides an asset class with unique risk-reward characteristics. While short-term risks exist, the potential for long-term rewards and tax efficiency makes these investments a compelling consideration.
Eckard Enterprises has 40 years of experience helping accredited investors directly own tangible assets in the US energy industry. Our team of engineers, geologists, and landmen has the depth of knowledge required to select oil & gas assets that align with our high standards. We focus our energy not only on providing high-quality assets but also on providing thorough education so that our clients gain a true understanding and awareness of an industry they may not be familiar with.
If you would like to learn more about mineral rights or other commodity investments we offer, fill out the form on this page to have one of our experts reach out, or simply call (800) 527-8895. We look forward to speaking with you.
Best regards,
The Eckard Team
[email protected] |1 (800) 527-8895