Tax Benefits

With a proper election, and when monies are considered at risk and not passive for IRS purposes, intangible drilling and development costs may be deducted as an expense for federal income tax purposes. Generally, intangible costs constitute anywhere from 75% to 95% of the total cost to drill, complete, and equip the well. All of these "non-salvageable" costs are deductible in the year expensed.

To be certain, this deduction can be quite significant, and the large write-off potential signifies the government's desire to increase domestic drilling discoveries.

In addition, the owner of an oil and gas interest is generally entitled to a deduction for depletion with respect to the income received from the productions of oil and gas. This allowance has changed several times through the years, but currently allows for 15% of the revenue to be tax-free.

The following is a generalized summary of certain items in the U.S. Internal Revenue Code relating to oil and gas exploration. It is neither exhaustive nor detailed. Each individual should understand how these items will impact him or her personally. In addition, other items unique to the individual may also be relevant. Investors should contact their tax consultants for a complete explanation of the benefits of investing in oil and gas