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Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits can greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures an excellent tax advantaged investment.
Intangible Drilling Cost Tax Deduction
The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually the majority (65 to 80%) of the cost of a well. These expenditures are considered Intangible Drilling Costs "IDCs", which are generally 100% deductible from federal income taxes during the first year. For example, a $100,000 investment could typically yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital. (For more information please see Section 263 of the Tax Code.)
Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment, or Tangible Drilling Costs "TDCs", are 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period. (For more information please see Section 263 of the Tax Code.) http://www.irs.gov.
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