Tax Implications of Purchasing Oil and Gas Producing Properties -
High gasoline prices are bringing added attention to America's dependence on oil, and the critical need for additional production. At the higher oil and gas prices wells that have not produced in years may now be commercially viable. For that reason, many people are looking to purchase oil and gas producing properties as part of their financial planning. While such activities may be quite profitable, one must realize that the purchase of producing and non-producing oil and gas properties is highly speculative. There are no assurances that past production will be any indication of future performance.
There are certain tax advantages that are available to the owner of producing properties. The following guidelines were prepared by the Company's accounting firm and are presented for information purposes only. Actual tax benefits to a purchaser of oil and gas production will vary from individual to individual. Therefore, any prospective purchaser should consult with his or her advisor or accountant for specific information as it would personally apply.
Congressional Tax Incentives Encourage Domestic Petroleum Development
Tax incentives are given to stimulate domestic oil production financed by private sources. Oil Production Projects offer several tax advantages and these tax benefits can enhance the economics of purchasing domestic oil production. These incentives are NOT “Loop Hole Incentives”. They were placed in the Tax Code by Congress.
Mineral Lease Cost/Tangible Production Cost Tax Deductions
Tangible well costs (i.e. pumps, tanks, sweetening plant equipment, etc.) can be deducted as depreciation over a seven year period. (See Section 263 of the Tax Code.) Lease operation costs (LOC) are 100% deductible.
Tax exemptions for Small Producers
This exemption allows 15% of the Gross Income from an oil producing property to be tax-free. (See Section 613A of the Tax Code.) Your Tax Accountant will determine if Cost Depletion or Percentage Depletion will yield a greater tax
Active vs. Passive Income
The Tax Code specifically states that a Working Interest in an oil well is NOT a “Passive Activity”. (See Section 469(c)(3) of the Tax Code.) Also, see “The Working Interest Exception” in the IRS Code.
