by Gregory J. Cook, EA, CPA
Accredited Tax Advisor
Some are risky in the "wildcat" style, while others pose much smaller risks for investors. Some have the potential for a rags-to-riches story, too, although a stable income and substantial tax advantages are more likely. Much depends on the type of investment.
One of the tax benefits of oil and gas investments is the ability to deduct intangible drilling costs, or IDCs. IDCs are expenses connected with drilling and preparing wells for production. Included are such items as wages, fuel, repairs, hauling charges and supplies. Initially, as much as three-fourths of an investment can go to pay for these intangibles, allowing a large deduction early into the investment.
Depletion is similar to depreciation in that it is a deduction made to recover capital invested in the oil and gas as it is removed from the ground and sold--being depleted. Just as real estate is assumed to depreciate (drop in value) as it grows older, the oil and gas is assumed to be depleted and drop in value as it is used up.