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Energy Oil is one of the most important natural resources known to mankind. For most societies in the world, oil is the principal natural resource that fuels their economies. Then why, in this great age of communication and technology, do we need to be concerned about a natural resource like oil? Simple. Nearly 98% of everything you have or do is in some way related to crude oil. Heat for your home, gas for your car, plastic soda bottles, and petroleum jelly are just a few examples of products created from crude oil. Over the last 10 years, the U.S. economy has underwent the largest economic expansion in history and cheap oil has fueled this unprecedented growth. Unlike the 1970s, when the U.S. was held at bay by OPEC withholding oil production for political reasons, the growth of the oil industry during the 1990s, and beyond, will more likely be determined by the laws of supply and demand. As democracy and capitalism are spreading around the world, global oil consumption is at record levels. Throughout Latin America, India and Asia, economic growth is accelerating at a remarkable pace; much faster than anything we have seen in the U.S. Tax Benefits Congressional Incentives Encourage Domestic Petroleum Development Oil and natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments. Intangible Drilling Cost Tax Deduction The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about 70% to 100% of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 70% to 100% deductible during the first year. For example, a $100,000 investment could yield up to $100,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital (See Section 263 of the Tax Code). Tangible Drilling Cost Tax Deduction The total amount of the investment allocated to the equipment “Tangible Drilling Costs (TDC)” is 100% tax deductible. In the example above, the remaining tangible costs ($25,000) may be deducted as depreciation over a seven-year period (See Section 263 of the Tax Code). Active vs. Passive Income The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. (See Section 469(c)(3) of the Tax Code). Small Producers Tax Exemption The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the "Percentage Depletion Allowance", is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The "Small Producers Exemption" allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free. Lease Costs Lease costs (purchase of leases, minerals, etc.), sales expenses, legal expenses, administrative accounting, and Lease Operating Costs (LOC) are also 100% tax deductible through cost depletion. Alternative Minimum Tax Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item. "Alternative Minimum Taxable Income" generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. "Tax preference items" are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon. All investment strategies have risks. Past performance and/or forward statements are never an assurance of future results. Only a sponsor's Private Placement Memorandum or Prospectus is controlling. Nothing contained herein shall constitute an offer to sell or a solicitation of an offer to buy any security. Such offers may only be made by written prospectus and only in a jurisdiction where the security is duly registered or exempt from registration therein. |
3070 Bristol Street • Suite 500 • Costa Mesa, CA 92626 • Tel 877.428.1031x307 • Fax 315.217.0410
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