Oil and Gas Frequently Asked Questions

Intangible drilling cost

When can I deduct intangible driling costs (IDC)?  IDC is deductible in the year paid.  Click here for link to IRS Publication 535 (Chapter 7).
Do I have to deduct intangible drilling cost in one year?  No-you have the option to write off IDC over a 60 month period.  Click here for a link to IRS Publication 535 (Chapter 8). 

Depletion

Can I deduct depletion?  How is depletion calculated and how do I know how much is deductible? Deduction of depletion is a complex tax issue.  Click here for link to IRS Publication 535 (Chapter 9).


Passive activities

Aren't partnership investments considered "passive"?  I can't deduct passive losses, can I? There is an exception for a working interest in an oil or gas well which you hold directly in an entity that doesn't limit your liability (such as a general partner interest in a partnership). Click here for link to IRS Publication 925 and go to page 5 – activities that are not passive activities (Item 2).

Alternative Minimum Tax

Are any of these deductions subject to the alternative minimum tax (AMT)? Maybe, however if you are considered an "independent producer" AMT "adjustments" are limited.  Click here for a link to Form 6251 instructions - see instructions for Lines 10 and 26.

Self-employment tax

Is income from an oil and gas partnership self-employment income?  A working interest held individually or through most pass-through entities is considered self-employment income.  Losses can be used to offset self-employment income from other sources. 

Unrelated Business Taxable Income (UBTI)

Am I subject to UBTI?  An exempt organization may be subject to UBTI, see IRS Pub 598.

Other information

Description of Present Law Relating to Federal Tax Provisions That Affect Energy Production and Conservation (Prepared by the Joint Committee on Taxation)

IRS glossary of oil and gas terms

OSHA glossary of oil and gas terms

OSHA illustrated glossary of drilling rig components

KPMG Primer on Domestic Oil and Gas - IDC

KPMG Primer on Domestic Oil and Gas - G&G


 
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