How to invest in oil and gas companies, investment return, why invest in oil? Investment program for Oil and gas investors

Offset Your Capital Gains with Direct Oil and Gas Investments

The demand for oil is high because it is used in many different products applications that all of us use daily. Oil is responsible for supplying gasoline for vehicles, heating homes, making synthetic fibers such as nylon and polyester, and in the manufacture of many products that are used daily, for example, detergent, medicine, candles and make-up. Private investment in oil and gas can be quite advantageous for those who are looking for ways to offset capital gains. As a matter of fact, the government offers significant federal tax benefits as an incentive to investors.

What are the Benefits of Investing in Oil and Gas?

Intangible Drilling Costs

One of the most important benefits is the federal tax advantages provided through the “intangible drilling cost write-off”. Often referred to as IDC, the amount of investment income on which taxes are owed is reduced when using this deduction. Typically 75% to 80% of money invested is intangible. The amount of the investment that is spent opening the well are intangible and can include:

  • Drilling supplies (except for the drilling equipment)
  • Fuel
  • Wages paid to drivers
  • Any other items needed for opening a well

This is an investment often used by many who have profits from selling a business or receive a lump sum from another source that would be taxable otherwise. When the price received for something is more than the price that was actually paid for it, this is a capital gain. Investments are made to realize a profit and the profit is a capital gain. However, the capital gains are offset when initially investing in drilling for oil and gas because they are considered “intangible drilling costs” and a 100% deduction can be taken this first year. Additionally, the investor's adjusted gross income can be lowered by as much as 80% of the amount invested during the first year and this lowers federal and state taxes owed. If the investor is self-employed, 15% of the self-employment tax can be saved in addition to other taxes.

After the first year, there are other deductions that can be taken to offset capital gains when investing in oil and gas. There are also “tangible drilling costs” associated with these investments. This includes 15% to 25% of money invested that is allotted to equipment needed for drilling. This amount can be written off as expenditure and depreciated over the next 5 to 7 years.

Therefore, when investing in oil and gas, offsetting capital gains is far more lucrative than it would be if the investment was in stocks or bonds. The maximum amount that can be written off for stocks or bonds is approximately $3,000 each year whereas over a period of 5 to 7 years, 100% of oil and gas investments may be written off, which includes 75% to 85% during the very first year.

Other Deductions that can Offset Capital Gains Depletion allowance is another deduction available to those who invest in oil and gas. There are two ways of calculating this deduction, the cost and the percentage method. The cost method is based on initial cost of the investment. When income is generated from the investment it is considered a partial return of the capital investment and as such part of the income is exempt from taxes.

The percentage method allows taxpayers to take a deduction on a percentage of the income. This amount is not fixed and varies each year. This allowance can be quite profitable because it permits investors to take a percentage of their income and deduct it from overall annual income as long as the investment is producing. This applies even if the initial cost of the investment has been recovered. This method is only allowed if the income is from extraction and sale. It cannot be used for manufacture, processing or refining income.

Development and Exploration

Private investment in oil and gas can include two types, the development and the exploration. Development is when oil and gas are sought in areas where there are existing wells. Exploration is when wells are drilled in areas where there are no other wells. Exploration carries a higher risk than development, but both can provide investors with income that can be partially sheltered.

These investments are not affected by the economy in the same way as others. Oil and gas investments are generally long-term and because prices increase during times of inflation, the income from these investments rises rather than falling.

Private oil and gas investments can be a very profitable venture. It is not risk-free, but there are many advantageous tax benefits that can aid in offsetting capital gains. These investments can produce income for several years. Of course, the production decreases over the years and eventually the wells stop producing, but investors do not have a final capital gain as with other investments. As you can see, private oil and gas investments can be a very good choice for a number of reasons, including profits that are protected by federal tax laws.

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