Tax Advantages Of Investing In Oil And Natural Gas
Oil and natural gas ventures are one of the best tax advantaged investments available. Different states offer different tax exemptions into this venture. They offer these incentives to promote domestic drilling of oil and natural gas.
Some of the most common tax exemptions include; Small producer exemptions, also known as percentage depletion allowance. This incentive allows for a percentage of the gross income from oil and gas producing property to be tax free. Texas for instance offers 15% as small producer exemptions.
Another tax advantage of investing in oil and natural gas common in many states are deductions for intangible drill costs. As such, governments offer tax exemptions to everything that is involved in the drilling of oil and/or natural gas but the actual drilling equipment. These include but are not limited to; chemicals, labor, mud, grease and any other miscellaneous items necessary or used in the drilling of the oil. Most of the time, this deductions are employed even when the well did not actually produce or strike oil.
Tangible drilling costs are yet another form of tax deductions that some states offer in this investment. Most governments encompass this to include the actual direct costs of drilling equipment, deductible after a given number of years. As such, some states would put this number of years as seven, ten or so on, meaning that at the end of these number of years, the costs of these equipment (s) are 100% tax exempted.
Lease costs are also deductible in the year that they are incurred. These costs could include accounting expenses, lease operating costs, purchase of lease and mineral rights and so on. They cover the day to day operations of the well, and as well, the costs of re-entry or re-work of an existing producing well.
At the same time, most states offer tax advantages of investing in oil and natural by incorporating a tax code that stipulates that working interest in oil and natural gas activity is not considered a passive activity. What this basically means is that, all net losses are active income and can be relieved against other systems of active revenue such as earnings, interest and capital gains.
All natural resources are entitled to a percentage (statutory) depletion income tax deduction. This inference will usually shelter a certain percentage of the well’s yearly production from the income tax. Closely related to this tax exemption is cost tax depletion which is calculated just based upon the relationship between present productions as a proportion of total recoverable reserves?
Through all these tax advantages of investing in oil and natural, the risk capital is subsidized by the governments employing the same. All these tax advantages mean that the profits will be higher for the investors, a fundamental reason why investment in oil and natural gas is a worthy venture to partake. The good thing about renewable energy sources is that a majority of them are infinite.