Oil & Gas Investment Tax Benefits
Direct oil and gas investments can deliver large first‑year deductions and durable, production‑based write‑offs. The biggest drivers are intangible drilling costs (IDCs), equipment depreciation, percentage depletion, and the working‑interest exception under §469, when structured correctly.
IDCs
Cut Your Taxes in Year 1 and Reduce Capital at Risk
IDCs are the consumables and services that get a well ready to produce. They often represent 60 to 85 percent of upfront cost. If you hold a working interest and elect to expense, you can usually deduct them in the year incurred, reducing at‑risk capital immediately.
TDCs
Turn equipment into multi‑year deductions that smooth cash flow.
TDCs are equipment with resale value, such as casing, tubing, and tanks. You capitalize these costs and recover them over time, generally with MACRS. Plan placed‑in‑service dates to align with bonus depreciation where available so equipment deductions complement your IDC strategy.
Depletion
Take a 15 percent production deduction that can outlast basis.
Depletion reduces taxable production income each year. Eligible independents and royalty owners can claim percentage depletion at 15 percent of gross income per property, subject to caps. Compute percentage and cost depletion annually and take the larger allowable amount, including after basis is fully recovered.
Section 469
Use early losses to offset wages and business income.
With a true working interest that carries unlimited liability during drilling, tax losses are treated as nonpassive under Section 469. Early losses, often from IDCs, may offset wages or business income, subject to at‑risk rules and documentation. Entity structure determines eligibility.
