Tax Benefits of Direct Participation in Oil & Gas - An Overview

June 17, 2019

Author: Jeff Gostovich
D: 832.987.2279
Industry: Oil & Gas


The U.S. government has been on a mission to reduce our country’s dependence on foreign oil and achieve energy independence. Increased domestic drilling to boost our own oil reserves is necessary to make this goal happen and, for decades, various administrations have taken steps to stimulate that action. However, contrary to what most of the public may think, the approach to making this a reality is not focused on incentivizing the super majors (e.g. Exxon). Instead, the approach rests largely on many small-scale, privately funded oil and gas ventures.

Congress has offered oil and gas investors and small producers some of the most attractive tax incentives available in the U.S. tax code today - incentives unmatched in any other industry. With these substantial tax breaks, oil and gas investing has never looked better.

Tax Benefits for Investors

One of the best tax advantages made available to small producers and their Family Office investors is derived from the percentage depletion allowance. This deduction, which is available only for those with domestic oil and gas holdings, allows for approximately 15 percent of all gross income from oil and gas wells to be tax-free. Small producers and investors can claim this allowance for as long as their oil or gas wells produce, with no cap on either the amount of tax-free income they receive nor the length of time in which it’s earned.

Another tax benefit is tangible drilling cost deductions. The total amount of dollars spent on the investment that was allocated to the equipment is 100-percent deductible and may be deducted as depreciation over a seven-year period or faster. For the next couple years, immediate expensing (“bonus depreciation”) is available under tax reform.

Also, costs incurred, including just about everything on a project except the actual drilling equipment, such as labor, supplies, and other items necessary for drilling, are considered intangible. These intangible drilling cost deductions (IDCs), which usually eat up about 70 to 80-percent of the total cost of drilling a well, are allowed to be taken at 70-percent the year the expenses are incurred, with the rest spread over 5 years. For example, an investor who invests $1,000,000 in a direct participation program to drill domestic oil & gas wells, can write-off up to $560,000 of the investment as a tax deduction the year the wells are drilled. The remaining $240,000 of intangible costs can be amortized over the next 5 years. This tax deduction typically lowers the at-risk dollars of the investment by 20% to as much as 60% or more depending on the investor’s state and federal tax brackets.

Many of the administrative and operational costs, including accounting, sales, legal, lease costs, and lease operating expenses are all 100-percent tax deductible, as well. These are just a few of the examples of the tremendous tax benefits available to oil and natural gas investors today. This type of tax shield means that an investment in oil and gas today is not only a smart strategy for any investor looking for security in investing for the immediate future, but it also provides a safety net for financial stability long-term.

These advantages are subject to complicated rules that can limit the tax benefit, including the alternative minimum tax. For more information on how Entoro can assist in structuring a tax-advantaged investment strategy in oil and gas wells, please visit