Investing in Oil Wells
Oil is and definitely will carry on being the lifeblood of the world economy for the following several decades, and oil consumption is anticipated to increase more than Twenty percent over the next decade alone, making investing in oil wells an attractive option for the right investor. Investing in oil wells is not an investment that is appropriate for just any investor. In fact, in order to qualify for investing in oil wells, the investor must be accredited and well-informed, with a net worth of more than $1,000,000 or annual income of $ 200,000 alone or $300,000 with spouse. The functional risks linked to investing in oil wells can be offset because of the high profitability of successful wells.
There are two basic strategies to investing in oil wells. The first way of investing in oil wells is through acquiring the stock of oil and gas companies. The second opportinity for investing in oil wells is via direct participation within the ownership ad operation of an oil well, that the investor is able to deduct expenses and share with the income generated by the oil well.
Direct participation programs (DPPs) allow the investor investing in oil wells better understanding of the level of an investment required and gives those investing in oil wells the opportunity to take a number of tax deductions, including a write off for the costs associated with drilling, testing, and completing the well. When investing in oil wells through Direct Participation Programs, other tax incentives to enhance investing in oil wells remain sustained by the government as a way to foster continued development. These tax incentives include:
1. IDC?s or intangible drilling costs.? Intangible drilling costs are things such as the cost for drilling including the labor, grease, chemicals, etc. These costs usually are 65-85% of total drilling costs. All of these related expenses are completely deductible within the first year. The first year is considered to become the season that the investment was initially started. (Section 263 of Tax Code)
2. Depletion Allowance: Once a well is in production, the participants inside well are allowed to shelter a few of the gross income derived from the sale of the oil and/or gas through a depletion deduction. Two types of depletion are available, cost and statutory (also referred to as percentage depletion). Cost depletion is calculated based upon the partnership between current production like a percentage of total recoverable reserves. Statutory or percentage depletion is subject to several qualifications and limitations. This deduction will normally shelter 15 % from the well?s annual production from income tax. For ?stripper production? (wells producing 15 barrels/day or less), the depletion percentage can be up to 20%.
3. Active vs. Residual income: The tax code specifies that a working interest (as opposed to a royalty interest) in an oil and gas well is not considered to be a passive activity This means that all net losses are active income incurred in partnership with well-head production and will be offset against other kinds of income, including wages, interest, capital gains, etc.
Investing in oil wells is not for everyone, but for those well-qualified investors, investing in oil wells is one area worth consideration. Even as the U.S. pushes for more economical vehicles to balance demand for oil, other countries like China and India are just beginning to industrialize, as well as the international demand for oil will continue to improve whilst the supply actually starts to dwindle. The upward pressure on oil and gas prices makes investing in oil wells an attractive option for sophisticated investors.
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