Tax Benefits

In an effort to stimulate domestic natural gas and oil production financed by private sources, Congress provided tax incentives in the 1990 Tax Act
that significantly enhanced the economics of investing in oil and gas. These incentives are not “loop holes.” They were placed in the Tax Code by
Congress to make participation in oil and gas ventures one of the best tax advantaged investments available. The new Tax Code specifically states
that a working interest in an oil and gas well is not a “passive” activity. Therefore, deductions can be offset against any income. This includes
active stock trades, salaries, and business income. (section 469 (c)(3) of the Tax Code)



Intangible Drilling Costs (IDC’s)
  • Labor, drilling rig time, drilling fluids, chemicals, mud, leases, and rentals
    • These expenses are deductible, because they offer no salvage value whether or not the well is subsequently declared to be dry
  • Usually represents about 2/3rds of the well cost
  • Deducted usually in the tax year in which the intangible drilling costs occurred
Tangible Drilling Costs (TDC’s) / Depreciation
  • Hard assets such as the wellhead, casing, tanks, pumping unit, and production equipment.
  • Usually represents around 1/3rd of the well cost
  • May be depreciated over 7 years
    • At 33%, a $100,000 dollar investment would deduct $33,000 over a 7-year period to generate a total savings of around $13,068 and an annual savings of $1,867 to reduce the net investment by 1.87%
Depletion Allowance (“Small Producers Exemption”) (Tax Code Section 613A)
  • Once a well is in production, participant investors are allowed to shelter some of the gross income derived from the sale of the oil
    • Two types of deductions are associated with depletion
    • Cost Depletion – Calculated based upon the relationship between current production as a percentage of total recoverable reserves
    • Statutory Depletion (percentage depletion) – is subject to several qualifications and limitations
      • Allows up to 15% of the gross income from the well’s annual production to be excluded from income tax
      • So, for every $1 million in gross income we earn, $150,000 will be tax-free
      • For “stripper production”, (wells producing 15 BPD or less), the depletion percentage can be up to 20%
  • This tax benefit is not available for entities owning more than 1,000 barrels of oil average daily production (Midwest does not anticipate exceeding this daily average production level).


TAX INFORMATION DISCLAIMER:  Midwest Energy Partners, LLC. is not a Tax Advisor, CPA, or Tax Attorney and is not certified to give any tax advice.  Each investment individual may or may not qualify for certain deductions contained herein.  The information on this page is for education purposes only.  It is highly recommended you seek advice from your own tax professional or an accountant that is familiar with these types of investments before making an investment decision.  Midwest Energy Partners, LLC. offers no professional tax advice.