Friday, March 7, 2008

Tax free income tax advantage of oil and gas investments due to a depletion allowance

Investing in domestic oil and natural gas drilling ventures generates a high percentage of tax free income due to the depletion allowance.
Generally the first 15 to 23% or so of income generated each year from an oil or gas well is tax free due to a depletion allowance. You can think of this in a similar way to depreciation for buildings. In that case the IRS assumes a building will have a useful life of say 27 years over which time it can be depreciated to a value of zero dollars. Each year you write-off a portion of the building's value over this period to reduce your income and the associated taxes.

How does the depletion allowance work for oil and gas investments?
For oil and gas, the IRS recognizes these wells only have a finite amount of oil or gas until they are no longer be productive. Therefore, the IRS allows investors to have a depletion allowance yearly against the generated income over generally five to seven years expected life of the well. You can click on the title of this post to go to IRS publication #535 which gives more specifics on how to calculate the mineral (oil and gas included) depletion allowance. However, most oil and gas drilling ventures/investments will generate a K-1 form yearly letting you know what they calculated as your depletion allowance for tax purposes. You don't need to calculate this manually on your own unless you wish to double check what they report on the K-1.

Bottom line...
No other investment in the U.S. gives you the potential for significant yearly tax free income from the investment than an oil or gas drilling investment. Sure, government securities can provide tax free income, but not the same potential returns that can be gained from a good productive oil or gas well.

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Copyright 2008 Ole Cram. Ole Cram is President of Marcobe Investments, Inc., a corporation that invests in various oil and gas ventures and refers accredited investors, investment managers, financial advisors, investment funds, and others to the associated oil producer of these projects for their consideration to also participate. Feel free to email us at with any questions, thoughts, or requests for information on what projects we are invested in.

This article was posted at Accredited Investor Blog: Past articles can easily be found at This article is provided for educational purposes only and is not meant to be a substitute for tax, legal, financial, or other registered professional advice for your specific situation. Always seek the advice of a professional before making any related decision. Sphere: Related Content

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