For exploratory wells when monies are at risk and not passive for IRS purposes, depending on the financial situation of the investor, the IDC ( Intangible Drilling Cost ) may be expensed. The TDC ( Tangible Drilling Cost ) may be capitalized.
As a rule of thumb, about 75%-95% (give or take 10%) of the total cost for drilling, completing, and equipping the well falls under the IDC and may be deductible the year expensed. The 25% (give or take 10%) of the total cost of the well falls under TDC and may be depreciated over seven years.
It is advised that each individual investor has their own advisor concerning these matters as it relates to their personal situation. For tax filing purposes, the oil and gas company offering the prospect will provide the investor with a statement showing how much money invested went for IDC and how much went for TDC.
By electing at risk and not passive participation, intangible drilling and development cost may be deducted as an expense for federal income tax purposes. The prepayment of intangible drilling cost is generally allowed if drilling occurs within 90 days after the close of the taxable year in which payments are made.
INTANGIBLE DRILLING COST
IDC is defined as any expenditure that in itself does not have a salvage value and is “incident to and necessary for the drilling of wells for the production of oil and gas” U.S. Treas. Reg. Section 1.612-4(a).
¨ Agreements and negotiations in obtaining an operator for the well
¨ Agreements and negotiations with drilling contractors for the bids and drilling
¨ Survey and seismic work for locating a well site
¨ Construction or a road to a drill site
¨ Dirt work on location such as cellar, pits and drilling of the well
¨ Water, fuel, and other items necessary for drilling
¨ Logging , Acidizing
¨ Rental equipment for oil storage during testing
¨ Cost of removing rig from location, trucking, dozers and labor
¨ Dirt work for clean up
¨ Cementing and installing casing
TANGIBLE DRILLING COST
TDC is defined as lease and well equipment that is installed or constructed in connection with drilling, completing, and production.
¨ Surface casing even though unsalvageable
¨ Production casing even though most of it is unsalvageable
¨ Transportation of casing and tubing from manufacturer to supply point
¨ Wellhead (Christmas tree)
¨ Pump jack, treaters, and separators
¨ Recycling equipment, including necessary flow lines
¨ Storage tanks
The owner of an oil or gas well interest is generally entitled to a deduction for depletion with respect to the income received from the production of oil and gas. This allowance has changed several times through the years, but at the present it is 15%.
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