Tax Benefit Considerations
- Intangible Drilling and Completion Costs (IDC's) - When a well is drilled, there are several expenses that offer no salvage value if the drilled well is subsequently determined to be dry. These types of expenses are known as Intangible Drilling and Completion costs or IDC's. Based on current tax laws, IDC's are 100% deductible during the first year. On the average, IDC's generate between 70 and 80 percent of a drilling programs total expenses. Our drilling programs offer our joint venture partners 100% IDC write-offs.
- Depreciation - As opposed to materials and services that offer no salvage value, equipment used in the completion and production of a drilled well is generally salvageable. Because these items retain a salvage value, they must be depreciated over time. BoCor currently utilizes the Modified Accelerated Cost Recovery System to account for depreciation of these expenses. BoCor retains ownership of all salvageable equipment and thus participates fully in the depreciation tax benefits.
- Depletion Allowance - After a well is drilled and is producing, the owners of the production are allowed to shelter some of the gross income through a depletion deduction. This depletion deduction or "Small Producers Exemption" specifically allows between 15 - 24% of the gross income from an oil and gas producing property to be tax free. BoCor utilizes the percentage (statutory) depletion methodology for calculating depletion expense.
- Active Income - The new Tax Code specifically states that a Working Interest in an oil and gas well is not "Passive" activity; therefore, deductions can be offset against income from active stock trades, business income, salaries, rents, etc.
These are the main tax advantages gained from a direct investment in a crude oil and natural gas drilling program. Thus, not only do BoCor's Drilling Programs provide a competitive cash to cash return, they provide a host of congressionally sponsored tax benefits. On a total risk/reward basis, an investment in a crude oil and natural gas drilling program is a wise and profitable decision for the diversified investor.
Click on the link to see example of a typical BoCor tax benefit in year 1:
Year 1 Tax Examples