Domestic Oil and Natural Gas Tax Incentives

With the goal of encouraging more privately funded, domestic production of oil and natural gas, the United States Congress allows for tax incentives which benefit the participants of oil and natural gas drilling ventures. In effort to reduce the United States’ dependence on foreign sources of energy and to establish oil and gas as one of the most advantageous investments from a tax standpoint, Congress has incorporated several economic advantages and benefits for domestic investments into the Tax Code. Such tax advantages affect companies such as Chevron and Western Pipeline Corporation as well as private investors.

One substantial tax incentive for oil and gas drilling in the United States is known as the Intangible Drilling Cost Tax Deduction. The Intangible Drilling Cost Tax Deduction (IDC) allows for the intangible expenses associated with drilling to be one hundred percent deductible in the first year of operation. Such intangible expenditures of drilling include the wages of laborers, necessary chemicals, grease and mud, to name a few. These types of intangible expenses make up a majority of the expenses associated with privately funded drilling, making this a valuable tax incentive for investors. For instance, for a one million dollar investment, assuming that seventy five percent of the expenditures are intangible drilling costs, $750,000 would be deductible in the first year.

Affecting privately funded domestic oil and gas investments, a deduction has also been established by Congress for tangible drilling costs, called the Tangible Drilling Cost Tax Deduction (TDC). This deduction allows for a one hundred percent tax deduction for the costs of equipment. In the example above, where $750,000 is deducted for intangible drilling cost, the remaining cost of $250,000 could be deducted over the next five to seven years as depreciation. Additionally, the cost of leases and lease operating costs, legal expenditures, sales costs and administrative accounting are one hundred percent deductible by cost depletion.

The 1992 Tax Act gives additional tax benefits for domestic natural gas and oil drilling by exempting Intangible Drilling Cost as a Tax Preference Item. Tax Preference Items are incorporated into the Tax Code and aim to either decrease or eradicate income taxation altogether. Before the 1992 Tax Act, contributors to oil and gas drilling ventures were accountable for the standard Alternative Minimum Tax in the amount that such tax surpassed their regular taxes.

The tax advantages described in are not intended to be loop holes in the Tax Code, but rather to provide incentives for domestic oil and gas production.