Reduce taxes now with direct oil and gas participation

How oil and gas delivers valuable tax breaks

IDCs: deduct the largest share of upfront cost in the year incurred

Intangible Drilling Costs are services and consumables with no salvage value, such as labor, site prep, mud, fuel, cementing, logging, and completion services. IDCs often represent 70 to 85 percent of a well’s upfront budget. Eligible working‑interest owners who elect to expense may deduct up to 100 percent when costs are incurred.

TDCs: depreciate equipment for multi‑year relief

Tangible drilling costs are physical assets with salvage value, including rigs, casing, tubing, tanks, and wellheads. These costs typically account for about 15 to 30 percent of the total and are depreciated, commonly over seven years, which extends deductions beyond Year 1.

Percentage depletion: claim 15 percent of gross production income

Eligible independents and royalty owners may deduct 15 percent of gross income from the property each year, subject to per‑property and overall income limits. Percentage depletion can continue after basis is fully recovered, which supports after‑tax cash flow over the life of the well.

Active income offset: use losses where they matter

Income and losses from a true working interest that bears drilling and operating costs are generally treated as nonpassive. Early‑stage losses, often IDC‑driven, may offset wages or business income, subject to at‑risk and other limits. Royalty interests are passive and do not bear costs.

A worked example to size the impact

Assumptions
Annual income: $400,000
Investment: $100,000 in an exploration project
First‑year IDC allocation: $80,000
First‑year TDC deduction (1 of 7 years): $2,857
Total first‑year deduction: $82,857
Taxable income after investment: $317,143
At a 37 percent federal rate, first‑year tax savings are approximately $30,657. This reduces effective cash outlay by nearly one third before state effects and future depletion.

A strategic place to park capital before filing

Large first‑year IDC deductions can reduce this year’s liability, while equipment depreciation and percentage depletion provide continued relief in future years. The combination improves portfolio liquidity and can make a moderate pre‑tax return attractive on an after‑tax basis.

What to confirm before you commit

Structure and eligibility

• Hold a working interest if you intend to use losses against ordinary income.
• Confirm drilling‑phase unlimited liability where appropriate for nonpassive treatment.
• Verify clear IDC versus TDC splits in the AFE and operating agreements.

Documentation and timing

• Align Q4 spuds and services so IDCs are incurred before year‑end.
• Track equipment delivery, installation, and initial production to support placed‑in‑service dates.
• Maintain invoices, field tickets, basis roll‑forwards, K‑1 coding, and property‑level income for depletion.

Reduce taxes now and build durable cash flow

For accredited investors, direct oil and gas participation offers a rare mix of immediate deductions and ongoing production‑based relief. Use IDCs to pull value into the current year, depreciate equipment for multi‑year protection, and apply percentage depletion as wells produce. Structure and records determine how much benefit reaches your return.