Turn equipment into multi‑year deductions that protect cash flow

Tangible Drilling Costs (TDCs) are the physical assets that bring a well to life. They include casing, wellhead, tanks, production tubing, and surface equipment. TDCs are capitalized and recovered through depreciation, often on a seven‑year MACRS schedule, with bonus depreciation sometimes available. Used well, they smooth taxes and support margins over time.

Know what qualifies so you claim every dollar

Identify TDCs that build the asset

TDCs are the durable, salvageable items in a drilling program. Common examples:

• Steel casing and cemented strings
• Wellhead and Christmas tree
• Production tubing and artificial lift equipment
• Tanks, separators, meters, and surface facilities
• Gathering lines and related surface equipment

These assets are capitalized and depreciated rather than expensed in Year 1.

Separate TDCs from non‑TDCs

The following are not TDCs:

• Services and consumables such as labor, mud, fuel, and cementing
• Surveying, staking, and site preparation
• Land or mineral lease acquisition costs

Services and consumables are generally Intangible Drilling Costs (IDCs) and may be deductible when incurred for working‑interest owners. Mineral interests are recovered through depletion. Clear separation prevents audit issues and helps optimize tax timing.

Confirm who can claim TDC depreciation

• Working‑interest owners generally claim TDC depreciation based on their share of capitalized equipment. If the interest is non‑passive under the working‑interest exception, deductions may offset ordinary income subject to at‑risk rules.
• Royalty owners do not pay equipment costs and cannot claim TDC depreciation. They may claim depletion on production income.
• LLC or LP investors may receive TDC allocations. If the activity is passive for the investor, depreciation often becomes a passive deduction and may be deferred until passive income is available. Structure determines treatment.

Choose recovery methods that match cash flow

Use MACRS to recover capital predictably

Most oilfield production equipment is depreciated over seven years using MACRS. Recovery begins when assets are placed in service. Good records of delivery, installation, and first‑production dates support the schedule and reduce disputes.

Bonus depreciation: accelerate where available

Depending on current law, a portion of qualifying TDCs may be eligible for bonus depreciation, which can increase first‑year deductions. Coordinate placed‑in‑service timing with quarterly activity and project milestones to capture the best outcome.

See the math on $100,000 so you can plan with confidence

Assume an accredited investor contributes $100,000 to a horizontal well:

• IDC share: 75 percent ($75,000)
• TDC share: 25 percent ($25,000)

Without bonus depreciation, the $25,000 TDC basis is recovered over the MACRS schedule beginning in Year 1, with additional deductions in years 2 through 7. If bonus applies, a large portion of the $25,000 may also be deductible in Year 1. Combined with IDC expensing, total first‑year deductions can be significant. Actual results depend on structure, timing, and state rules.

Note: In the sample AFE illustrated in our investor guide, TDCs account for about 28.75 percent of total well cost, which is within a common range for modern horizontal projects. Your project mix may vary by design and basin.

Plan for limits and keep records that stand up

• At‑risk and passive‑loss rules: Treatment depends on ownership and liability posture. Model these early.
• Placed‑in‑service support: Keep invoices, delivery tickets, and startup logs tied to specific assets.
• AFE alignment: Ensure the AFE split between TDCs and IDCs matches vendor billing and the asset register.
• State differences: Some states require add‑backs or offer credits. Confirm in advance.
• Integration with depletion: TDC depreciation reduces taxable income from operations. Depletion is a separate, production‑based deduction. Both may apply when the well flows.

Position TDCs inside the bigger tax stack

• IDCs: often 60 to 85 percent of upfront costs. Frequently deductible when incurred for working‑interest owners who elect to expense.
• TDCs: capital equipment recovered via MACRS. Bonus depreciation may accelerate early years.
• Depletion: typically 15 percent of gross income for eligible owners, subject to per‑property and overall limits.

Used together, these provisions can pull forward deductions, then provide steady relief as production continues.

Actions that improve TDC outcomes

1. Insist on a detailed AFE with a clear IDC versus TDC split that ties to invoices.
2. Build an asset register that lists serial numbers, costs, and in‑service dates for each TDC item.
3. Coordinate timing so installation and first production align with bonus rules where applicable.
4. Pair TDC schedules with IDC strategy to balance first‑year impact and later cash flow.
5. Track by property to support per‑property tests and depletion.
6. Model scenarios with your CPA: MACRS only, MACRS plus bonus, and hybrid.
7. Retain documentation for audits, including approvals, AFEs, and vendor statements.

Be filing ready with this year‑end checklist

• Executed operating and ownership documents that confirm working‑interest status
• AFE with IDC and TDC classifications that reconcile to accounting
• Vendor invoices, delivery and acceptance paperwork for equipment
• Asset register with placed‑in‑service dates and locations
• Draft depreciation schedule and any bonus‑depreciation elections
• Basis roll‑forward for capital accounts and debt
• State tax workpapers showing add‑backs or credits
• Latest K‑1 and notes on passive‑loss or at‑risk positions, if applicable

TDC FAQs for quick clarity

Are TDCs deductible in Year 1

Not typically. TDCs are capitalized and depreciated. If bonus depreciation is available for the year and the asset qualifies, a large portion may be deductible in Year 1.

Do TDCs include land or mineral rights

No. Land and mineral interests are not equipment. They are capitalized and recovered through depletion or on disposition.

Can a royalty owner claim TDC depreciation

No. Royalty owners do not pay equipment costs. Working‑interest owners generally claim TDC depreciation.

How do TDCs interact with IDCs and depletion

IDCs affect Year 1 through expensing by eligible owners. TDCs create multi‑year depreciation. Depletion applies to production revenue each year, subject to limits. Use all three where eligible.

Do TDC percentages vary by project

Yes. In the sample AFE, TDCs represent about 28.75 percent of total cost. The mix shifts with design, depth, and completion style.

Outlook: plan annually and watch rule changes

Bonus‑depreciation percentages and state treatments can change. Revisit schedules each year, confirm eligibility, and coordinate placed‑in‑service timing with project milestones. Keep flexibility to update the plan as tax rules shift.

Use TDCs to balance near‑term and long‑term tax results

TDCs convert essential equipment spending into durable deductions that support cash flow beyond Year 1. Classify assets correctly, document placed‑in‑service dates, and coordinate with IDC and depletion strategies. This disciplined approach can lower taxes while building productive capacity.

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