Oil & Gas Tax Considerations

Posted at February 3, 2023 Posted In Helium, Investing, Taxes

Is the oil & gas industry given “special treatment”?

The short answer is no. But for investors like yourself, there are a number of incentives inherent to oil & gas that make it one of the most tax-advantaged commodity investments out there.

Read on to learn how cost-recovery is uniquely handled within this industry and how you can leverage these benefits to reduce your tax payout…


Cost recovery in the U.S. Tax System

Oil and gas developments are subject to many specific tax rules but essentially, it does not differ from the deductions enjoyed by other industries. Rather, these deductions are modified to fit the high-risk, high-cost nature of this line of business.

All industries can deduct the cost of goods and services to run the business, as well as the costs of the salaries of the employees. Businesses may also deduct any losses they’ve incurred during the year.

This helps owners mitigate start-up costs, or expenses they’ve taken on to grow their operations so that they can continue to build their business. Cost recovery is fundamental to the United States’ net income tax system.

Section 199 allows for business deductions equal to 9% of taxable income derived from qualified production activities. Qualified production activities are defined to include manufacturing, mining, electricity, and water production, film production, and domestic construction.

For oil- and gas-related activities, the deduction is permanently limited to 6%. Across all sectors, the deduction cannot exceed 50% of W-2 wages paid by the taxpayer for qualifying activities.

One of the key ways that the oil and gas industry uniquely recovers costs is through the ‘Intangible Drilling Costs’ (IDC) deduction


What are Intangible Drilling Costs?

Intangible drilling costs (IDCs) are defined as costs related to drilling and are necessary for the preparation of well production but have no salvageable value. It’s what’s needed to get the well operational and producing.

For example, the drilling crews that work around the clock and the drilling mud used to extract oil are both critical to the success of the well, just as much as the oil rig itself.

IDCs also include what’s necessary for the preparation of wells for the production of oil and gas, such as survey work, ground clearing, drainage, wages, fuel, repairs, and supplies.


The U.S. has offered a tax deduction for intangible drilling costs ever since 1913. Historically, this has been to attract investment capital to the high-risk business of oil and gas exploration — yet another example of the use of incentives in the tax system.

The deduction is allowed only for wells within or offshore the U.S. Because it is such a high-risk and high-cost industry, the intangible costs of drilling a well can be recovered immediately within the first year of drilling. The rest is spread over the next few years.

Is it possible for individuals to invest in oil & gas?

Investing in oil and gas is a great way for any taxpayer to reduce their taxes regardless of their main source of income. It’s a strategy that’s applicable whether you receive W-2 wages, net wages from a pass-through entity, or C-corporate dividends.

It’s important to note that this investment can’t be in the form of stocks — it must be a direct working interest in an oil and gas investment. How this is managed is also unique to this industry…

working interest is a type of investment in which the investor is directly liable for a portion of the ongoing costs associated with exploration, drilling, and production. This allows them to claim these deductions.

In addition to IDCs, the tax code considers the production of oil and gas to be an “active” income (or loss) which means that any tax losses can reduce your active, taxable income.

If you own a working interest in any oil or gas property, either directly or through an entity that doesn’t limit your liability concerning the interest, it is not a passive activity, regardless of your participation. This is an exception to the general rule, according to Section 1.469-1T.


How you can use an oil & gas investment to reduce your tax payout

As long as they have working interest, an investor can deduct 100% of the investment that is allocated to intangible drilling costs. These expenses roughly make up 60 to 80% of the total cost of drilling oil.

These costs are passed on from the operator and can be deducted in the first year of investment. The remaining tangible items, such as equipment, can be depreciated over the investment term.

There is also a depletion expense, which is calculated based on the production of oil or natural gas. It offers investors an additional deduction of up to 15% annually, depending on the oil and gas revenue.

Because of the high-risk nature of this industry, one aspect to keep in mind is that the well could underperform, fail, or even in a worst-case scenario, create a liability.

But this loss of investment would also be deductible.

Talk to us to learn how you can utilize an oil & gas investment to reduce your taxable income to zero.

Helium Equity Fund

Invest in a tax-incentivized solution for this historic commodity crisis.

In our previous emails, we’ve discussed how helium is found in natural gas deposits and is one of the rarest elements on Earth, yet the demand for this resource is higher than ever before. The U.S. is the world’s largest helium producer and provides 40 percent of the world’s supply — but issues in vital reserves and government policies have dwindled supply.

In line with the global supply crisis, we have a syndicated fund that would allow us to become a private supplier. We have mineral rights over the field with high concentrations of helium, which gives us a working interest in the production of natural gas.

All of our equipment depreciation will be able to offset ordinary income.

This summary is for informational purposes and to gauge potential investor interest. This summary is not intended to be a securities offering of any kind. Prior to making any decision to contribute capital, all investors must review and execute all private offering documents, including the Private Placement Memorandum and its exhibits, which contains the complete information about this investment opportunity. The information contained herein is from sources believed to be reliable. However, no representation by Match Real Asset Partners, LLC, either expressed or implied, is made as to the accuracy of any information on this property. All investors should conduct their own research to determine the accuracy of any statements made.

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