This Tax Information is for General Educational Purposes only. Consult your CPA professional for direct impact on your financial picture.

 

 

The Intangible Drilling Cost (IDC) deductions and the depreciation of tangible equipment on a typical oil or natural gas well allow a large income tax deduction of the investment in the first year (usually 65% to 80%). The first-year tax deductions for a $100,000 capital expenditure for drilling oil and natural gas wells can be approximated as follows:

Intangible Costs  
 Capital Contribution  $100,000
  Intangible Drilling Costs  x 65%
 Intangible Expenses Deduction  $65,000
   
 Tangible Costs  
 Capital Contribution  $100,000
 Tangible Equipment Costs     x 35%
 Intangible Expenses Deduction    $35,000
 Depreciated over 7 years        ÷ 7
 First year Tangible Depreciation Deduction  $5,000
 First year reduction in Taxable Income    $70,000

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