Investing in the oil and gas industry has many monetary and tax benefits. Oil and gas investments may be used to hedge portfolios that are heavily weighted in stocks, bonds and mutual funds. Tax benefits may include
Intangible drilling costs (IDC)Labor, drilling rig time and drilling fluids can be written off within the tax year in which the costs were incurred. IDCs usually account for 80% to 85% of the cost of the total well, and can be written off whether the well is a dry hole or a producer.
Intangible Completion Costs (ICC)Labor, completion materials, completion rig time and fluids can be written off within the tax year in which the costs were incurred. ICCs usually account for 15% to 20% of the cost of the well, and would be incurred only if a well was a producer.
DepreciationEquipment used in the completion and production of a well are depreciated over a seven year period utilizing the Modified Accelerated Cost Recovery System. Equipment in this category would include casing, tanks, well head and tree, and pumping units. These expenses usually account for 25% to 40% of the cost of the well.
Depletion AllowanceOnce the well is on production, investors are allowed to shelter some of the gross income derived from the sale of the oil/gas through depletion deduction. There are two different types of depletions. Cost depletion is calculated based on the relationship between current productions as a percentage of total recoverable reserves. Statutory or percentage depletion is subject to several qualifications and limitations. This deduction will generally shelter 15% of a well’s annual production from income tax. For wells that produce 15 barrels or less per day, depletion percentage can be up to 20%.
Lease Operating Expenses (LOE)This expense covers the day to day costs involved in a well operation. LOEs are usually deductible in the year occurred.
Tax benefits generated by direct participation in oil and gas operations are material. The immediate deduction of the IDCs are very significant and by taking this upfront deduction, the risk capital is effectively subsidized by the government by reducing the investor’s federal and state income taxes.
Louisiana Severance Tax Rates (Production Taxes)
Oil and Condensate
- Oil Full Rate: 12.50%
- Incapable Oil Rate: 6.25% (Oil from a well that is incapable of producing an average of more than 25 barrels of oil per day during the taxable month and which also produces at least 50% salt water per day.)
- Stripper Oil Rate: 3 1/8% (Oil from a well that is incapable of producing an average of more than 10 barrels of oil per day during the taxable month.)
- Condensate Rate: 12.50%.
- Gas Full Rate: July 1, 2014 through June 30, 2015- 16.3 cents per MCF.
- Incapable Oil Well Gas: 3 Cents per MCF for gas produced from an oil well which has a wellhead pressure of 50 pounds per square inch gauge or less under operating conditions. To qualify for the reduced rate an oil well must have a casing head pressure of 50 pounds or less per square inch for the entire taxable month.
- Incapable Gas Well Gas: 1 3/10 Cents per MCF for gas produced from a gas well which is incapable of producing an average of 250,000 cubic feet of gas per day. To qualify for the reduced rate a gas well must be incapable of producing 250,000 cubic feet of gas per day during the entire taxable month.