Special Tax Deductions for Oil and Gas Investments

Special Tax Deductions for Oil and Gas Investments

September 09, 2021

Now is a great time to invest in building America’s energy infrastructure. Energy investments have historically performed well and held stable throughout the economic seasons and provided a hedge against inflation. Oil and gas wells have generally been known to produce anywhere from 20 to 40 years, yielding consistent profits and creating tax benefits at the same time. Oil and gas well owners can realize immediate tax savings in the first year while building long-term wealth and opportunities for future residual income. A distinctive advantage of investing in oil and gas drilling projects is the unique tax benefits available.

Depletion Allowance

One tax benefit of investing in land that can be mined, versus other types of real estate investments, is the depletion allowance. Generally, land does not depreciate in the same way that buildings or other structures do, and so there is no depreciation deduction for the land itself. Oil and gas wells, however, allow for an annual depletion deduction equal to 15% of gross income, or 100% of net income (whichever is less). (1)

Active Income Deduction

If you own a working investment in an oil or gas well and you incur a net loss, you may be able to claim a deduction against other active income sources (such as wages or salaries). This type of deduction is not possible with many other types of investments in the event of a net loss. For instance, if you own stocks or mutual funds and your portfolio incurs a loss in a given year, you typically can only use those losses to offset other portfolio gains. (2)

Drilling Cost Deductions

Investors can write off tangible and intangible drilling costs. Intangible drilling costs (IDCs) can be expensed 100% in the first year, whereas tangible drilling costs require a 7-year depreciation schedule. In the event that a drilling project strikes a “dry hole,” 100% of the loss can be expensed. Plugging costs (costs incurred when shutting down a well that is no longer producing) can also be expensed rather than capitalized.

Alternative Minimum Tax (AMT)

AMT effectively limits how many deductions a taxpayer can claim if their income exceeds the annual exemption (for 2021, the exemption is $73,600 for single filers and $114,600 for married couples filing jointly). (3) Certain “preference items” are added back into adjusted gross income (AGI). The Energy Policy Act of 1992 removed IDCs as a “preference item” for AMT purposes, (4) which can shield some drilling cost deductions from being added back in, offering a tax advantage versus other types of investment vehicles.

We Are Here to Help

Oil and gas drilling projects offer lucrative opportunities for investors looking to lower their adjusted gross income while building a foundation for retirement and future generations. The tax advantages found in oil and gas have played an important role in America’s energy future by creating ways for investors to build critical infrastructures to ensure a continued supply of fuel for generations to come. If you would like to explore the possibility of investing in oil or gas, contact us at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

About Haydel, Biel & Associates

Haydel, Biel & Associates is an independent financial advisory firm serving individuals and families near Pasadena, California. The firm was founded in 2004 by Chris Haydel and Ricky Biel with a desire to provide unbiased, client-centered, community-based financial advice. Together, they have built a practice that has grown into a family of caring, smart professionals committed to blending proven investment methodologies with creative financial technologies that make it easier than ever to accomplish your goals. They strive to keep things simple and fun to give their clients peace of mind and alleviate financial stress. HBA Wealth takes care of their clients’ needs first and foremost and goes the extra mile to make their clients’ finances grow. To meet and see how the HBA Wealth team may be able to help, contact them today at (626) 529-8347 or email Ricky directly at ricky@hbawealth.com.

The commentary on this blog/website reflects the personal opinions, viewpoints and analyses of the Haydel Biel & Associates employees providing such comments, and should not be regarded as a description of advisory services provided by Haydel Biel & Associates or performance returns of any Haydel Biel & Associates Investments client. The views reflected in the commentary are subject to change at any time without notice. Nothing on this website constitutes investment advice, performance data or any recommendation that any particular security, portfolio of securities, transaction or investment strategy is suitable for any specific person. Any mention of a particular security and related performance data is not a recommendation to buy or sell that security. Haydel Biel & Associates manages its clients’ accounts using a variety of investment techniques and strategies, which are not necessarily discussed in the commentary. Investments in securities involve the risk of loss. Past performance is no guarantee of future results.


(1) https://www.irs.gov/irm/part4/irm_04-041-001#idm140692449181760

(2) https://www.investopedia.com/articles/07/oil-tax-break.asp

(3) https://www.irs.gov/newsroom/irs-provides-tax-inflation-adjustments-for-tax-year-2021

(4) http://www.ipaa.org/wp-content/uploads/2016/12/2009-03-IntangibleDrillingAndDevelopmentCosts.pdf