Learning To Preserve Energy

Most investment advisers suggest that individuals are better served in the long run by having a diversified portfolio. Individual investors can receive an up-front tax deduction, as well as ongoing revenue, by investing in exploratory oil wells in the Permian Basin.

The Permian Basin is an oil-producing region of west Texas and southeastern New Mexico. Oil production in the Permian Basin has risen sharply in recent years, making the region one of the most productive in the world. Technologies such as hydraulic fracturing and horizontal drilling have provided enhanced access to the underground formations of crude oil.

The most practical method to invest in exploratory drilling in the Permian Basin is through a limited partnership. A limited partnership is a pass-through entity, so it does not itself pay income tax. Income and deductions are passed through to each individual investor. As a limited partner, you receive the income and tax deductions, without incurring the legal liability of a general partner.

Intangible drilling costs deduction

A unique tax benefit available to the oil industry is the immediate write-off of most of the cost of drilling a new well. In other industries, the expenses of installing a large machine are generally included as part of the machine cost and then depreciated over several years. In contrast, the costs of labor, transportation, and supplies for a newly drilled well may be deductible as a current business expense.

Although supplies and fuel used in the construction of a new well are physical assets, the IRS refers to the up-front expenses as intangible drilling costs. The drilling rig itself is depreciated over its useful life. Once the well is up and running, it is ready to start producing a revenue stream that is likely eligible for another tax benefit.

Depletion allowance

Depletion is somewhat similar to the depreciation taken for machines and equipment. Depletion is a periodic deduction for the gradual extraction of natural resources. Depletion is often based on the amount of resources extracted, but small independent oil producers may be eligible to use an alternative depletion method based on revenue.

Smaller oil producers can deduct 15 percent of the income derived from an oil well as depletion expense. The percentage depletion method is not available to oil producers who refine more than 75,000 barrels per day on average.

The Permian Basin encompasses a large area of about 300 miles by 250 miles. Contact an oil and gas investment company, such as Tarka, for more information about opportunities in the region.