While many potential tax saving strategies are limited to business owners, oil and gas deductions can benefit high-earning W-2 employees as well. Energy investments avoid the phased-out deductions for real estate losses that investors face between $100,000 and $150,000 in income. These investments offer large tax deductions in the first year followed by attractive returns in future years.
Upfront Tax Savings
Large deductions in the first year of investment provide immediate tax benefits. Intangible Drilling Costs (IDCs) are the expenses to develop an oil or gas well that are not a part of the final operating well. With an upfront investment of $100,000, a typical investor would receive $70,000 in IDC deductions in the first year. Furthermore, they would also receive a deduction of about $5,000 in the first year for depreciation of tangible equipment.
The deduction for depreciation of equipment is an estimated $5,000 per year for 7 years. Earnings on investments are estimated at 8.3%, and oil and gas fields generally have a lifespan ranging from 15 to 30 years. These investments are located on U.S. soil which increases the nation’s energy independence and protects the stability of the investment.
The best way to utilize the tax savings in oil and gas is to become a direct investor. We recommend investing with the U.S. Energy Development Corporation as a General Partner. For more information, contact K&R’s in-house financial advisor Rick Montgomery at RMontgomery@krtaxes.com.