The Ultimate Guide to Tangible and Intangible Drilling Cost Deductions

The Ultimate Guide to Tangible and Intangible Drilling Cost Deductions

| August 18, 2021
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Oil and gas investments offer numerous tax advantages over other asset classes, specifically for sophisticated investors. Investing in the construction of a producing gas or oil well is a great way to build passive income and benefit from unique tax advantages.

Tangible vs. Intangible Drilling Costs

Drilling costs are broken down into “tangible” and “intangible” categories, which are subject to different tax rules. Tangible drilling costs usually comprise around 30% of the drilling costs for a new well. Tangible drilling costs generally include the direct cost of drilling equipment. Tangible costs must be depreciated over a 7-year schedule. Intangible drilling costs consist of a broader range of categories: employee payroll, surveying, supplies & materials, contract labor, fuel, and other project costs, excluding capital equipment. The owner of a well has the option of claiming 100% of intangible drilling costs immediately.

Direct Investment vs. Purchasing Stock

The ability to claim tangible and intangible drilling costs can serve as a key component of a multi-year tax strategy for an investor looking to lower adjusted gross income (AGI) in the short term while creating a source of residual income down the road. Bear in mind that in addition to deducting drilling costs, you can also claim depreciation on the underlying parcel of land (with most other real estate investments, only the structures are depreciable). Investing in an energy-sector stock or fund does not offer the tax benefit of investing in a drilling project, but still carries much of the same downside risk.

Risks and Benefits

As with any other type of investment, you have to decide on a strategy based on your time frame, risk tolerance, and goals. Some drilling projects are more exploratory or speculative than others, meaning you could run the risk of investing in a “dry hole.” You can invest in an existing well that is already producing, or perhaps in need of upgrade or repair. The trade-off, from a tax perspective, is that existing projects tend to offer less in the way of tax advantages, as the initial developer will likely have already claimed the tangible and intangible drilling cost deductions. The bottom line: For the right investor at the right time, the right type of oil and gas investment can offer an excellent opportunity, but this type of investment is not for everyone.

We Are Here to Help

Investing in oil and gas is not a “do it yourself” proposition. Determining if this type of investment is appropriate for your situation requires a comprehensive assessment. Oil and gas investments can add lucrative value and diversification as part of a well-balanced portfolio. We work with investors to develop financial strategies and carefully select the right vehicles to support each aspect of the plan at the right time. If you would like to explore the possibility of investing in oil and gas, call (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.

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