Tax Benefits For Oil And Gas Partnerships
There can be tax benefits for investors who invest in oil and gas partnerships. Oilandgaspartnerships.net urges investors to carefully review the tax benefits for oil and gas partnerships with an attorney or your tax professional to see how this may affect your personal situation
The potential tax benefits for oil and gas partnerships listed below are for information only. This information is not to be used for individual “Tax Advice”. Visit the IRS website for more specific information regarding Tax Benefits For Oil and Gas Partnerships.
INTANGIBLE DRILLING COST (IDC)
The primary expense incurred in oil and gas partnerships is for drilling, testing, and completing the oil or gas well. These costs can be deductible for tax purposes. They usually range form 65%-80%.The deductions that may be allowed include expenses for renting drilling rigs as well as the wage, fuel, and supply costs incurred in the process of drilling, testing, and completing the oil or gas well. The partner may alternately choose to deduct all expenses in a single year or amortize the cost over 60 months. (Please see IRC Sections 263(c) and 59(e) and Treasury Regulations 1.612 parts 4 and 5 for more information).
The investment made by oil and gas partners for equipment can be recovered over seven years through depreciation. Both accelerated depreciation and straight line depreciation can be used by the partnership based on which would provide the best benefit. (Please see IRC Sections (b) and (c) for more information).
Individuals who invest in oil and gas partnerships are allowed by the IRS to deduct a percentage – typically 15% – of the gross income produced by the well for depletion. This deduction is in addition to the standard depletion deduction available to all producers. For wells that meet certain marginal production guidelines set by the IRS, percentage deductions can be as high as 25% of the gross income produced by the well. (Please see IRC Sections 611, 613, 613A(c)(6) for more information).
GEOLOGICAL & GEOPHYSICAL DEDUCTIONS
Because the U.S. government wants to encourage investment in domestic oil and reduce reliance on foreign oil and gas, a relatively new deduction allowed by the IRS is for certain costs related to the geological and geophysical analysis associated with the development of the well. These costs can now be deducted over a 24-month period. (Please see IRC Section 167(h) for more information.
SELF EMPLOYMENT TAX AND THE CONVERSION FROM GENERAL PARTNER TO LIMITED PARTNER
A general partner’s share of net income or loss constitutes earnings from self-employment. It is likely there will be a loss in the year the well is drilled (due to IDC). This loss may be used to offset self-employment income. Generally, after a general partner converts to a limited partner, income from the partnership is not subject to self-employment tax. Because the partnership carries no debt, a general partner’s conversion to limited partner status should not result in adverse tax consequences. IRC Section 1402, Rev. Rul. 84-52, 1984 -1 C.B. 157.
ALTERNATIVE MINIMUM TAX
Investing in oil and gas partnerships can reduce each partner’s Alternative Minimum Tax (AMT) liability through the deduction of up to 40% of excess intangible drilling costs. (Please see IRC Section 57(a)(2)(E) for more information).
PASSIVE ACTIVITY EXCEPTION
The working interest in oil and gas property is specifically exempted from being defined as passive activity. Please see IRC Section 469(c)(3)(A) for more information). Because the general partner’s initial losses on the oil or gas investment are not passive, all income from the well will be treated as non-passive. (Please see IRC Section 469(c)(3)(B) for more information).
SPECIAL RULE FOR TIMING OF DEDUCTIONS
Investors in oil and gas partnerships are allowed to deduct the expenses for drilling in the year the investment was made if paid by December 31. Drilling operations must begin within 90 days of the end of the partnership’s established tax year. (Please see IRC Section 461(i)(2)(A) for more information).
9. MARGINAL WELL PRODUCTION CREDITS
When the published IRS reference price is less than a bench marked price point (currently $2 per mcf for natural gas and $18 per barrel for oil) additional tax credits (up to 50 cents per mcf or $3 per barrel) may be available to the investor in a gas and oil partnership. Please see IRC Sections 38 and 45I for more information).
The tax benefits for oil and gas partnerships referenced above are for information purposes only.
This information is not to be used for TAX ADVICE. Please contact your tax professional and or attorney for more information to see how these tax benefits for oil and gas partnerships may apply to your situation.