Eratz Oil & Gas - Oil and Gas Exploration and Development - Dallas, TX

Tax Incentives

Oil & Gas Investments Offer Substantial Tax Deductions

Taxes, aha! Yes taxes, our mandatory obligation that moves the wheels of our democratic form of government. Perhaps you've heard that O&G joint ventures can move your tax bill in your favor. It's true, so let's look into this further.

What you will learn here is a detailed introduction into the tax benefits O&G joint ventures provide. After reading it, you will have a good understanding of these deductions that reduce your tax bill. And we are among the first to agree that tax forms and instructions require a bit of study to get the numbers right. So at tax time, you might need to contact your accountant (or us) for additional information. But for now, please read further...

The U.S. government would like our country to become less dependent on foreign resources. So in order to encourage domestic O&G production, direct investments in oil and gas offer larger tax breaks than any other type of investment.

As a result, private investors can realize substantial benefits through the tax incentives that come from directly investing in oil and gas via O&G joint ventures. Tax advantages also provide partial protection in the event of an investment loss. Here is how:

  • Because of the substantial tax breaks offered, investors are essentially using pre-tax dollars to make their investment.
  • If a well turns up dry and there is no return on the investment, part of what investors are losing are pre-tax dollars which would have otherwise been paid to the government in the form of income tax-sometimes up to 30%-40% of the total investment.

Eratz joint ventures today have a high probability of striking oil, which means you the investor earn income. And your income is partially sheltered from taxes because of a depletion allowance. Here is why:

  • Because oil and gas are finite resources that will eventually be exhausted, depletion allowances are granted for a portion of the producing well's gross income. These allowances can shelter 15% of the annual production from income tax. After the well is producing, the proportion of resources extracted is divided by the total resources to provide the percentage of deduction. Deductions can be taken as long as the wells are productive.
  • And you also have a depreciation deduction from income. The actual tangible equipment and resources used to complete a well are generally considered salvageable, and thereby depreciated over a 7-year period. These tangible completion expenses can account for between 25% and 40% of the total well costs.
  • Tangible Drilling Costs (TDCs) TDCs also represent a substantial expenses like drilling equipment, pump jacks, and casing. TDCs are capitalized and depreciated over a 5-year period, and deductions are capitalized over five years.
  • Lease operating expenses are the ongoing costs to operate the well, and are deductible in the year the expenses are incurred.

Deductions are also allowed for intangible costs. For example:

  • Intangible Completion Costs (ICCs) average around 15% of the total cost of the well. ICCs are goods and services like labor, completion materials, completion rig time and fluids that have no salvage value. ICCs are completely deductible in the year the expense was incurred.
  • Intangible Drilling Costs (IDCs) are expenditures that have no salvage value - fuel, wages, hauling, and repairs. They typically comprise 75% to 85% of the total well and are 100% deductible against taxable income in the first year.

If you invest in an O&G joint venture, you will receive at tax time appropriate statements from the company tabulating the above costs so you can take these deductions when you file your taxes. And like we stated above, your accountant (or Eratz if you buy your joint venture from us) can go over more details then.

So there you have it: a detailed introduction into the tax benefits available when investing in O&G joint ventures. We invite you to contact us if you would like additional details.

Tax Considerations

Total Investment Intangible   Tangible
$81,250 $66,786   $14,464
Intangible Depreciation Write-Off:
Invested Capital Per Unit $81,250 $81,250 $81,250
First Year Write-Off 66,786 66,786 66,786
Tax Bracket     x 33%     x 39%     x 50%
Total Dollar Savings $22,039 $26,047 $33,393

Total Investment Intangible   Tangible
$162,500 $133,572   $28,928
Intangible Depreciation Write-Off:
Invested Capital Per Unit $162,500 $162,500 $162,500
First Year Write-Off 133,572 133,572 133,572
Tax Bracket     x 33%     x 39%     x 50%
Total Dollar Savings $44,079 $52,093 $66,786
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