Investors

Includes expenditures for wages, fuel, repairs, hauling, supplies and other costs and expenses incident to and necessary for drilling a well and preparing it for production of oil or gas. These costs do not create salvage value. Intangible drilling costs can, at the election of the taxpayer, be either deducted in the year paid or amortized over a sixty-month period. IRC Sections 263(c), 59(e), and Treas. Reg. Section 1.612-4(a).

The term passive activity does not include any working interest in any oil or gas property which the taxpayer holds directly or through an entity under which state law does not limit the liability of the taxpayer with respect to such interest. Material participation not required. IRC Sections 469(c)(3)(A) and 469 (c)(4).

Investor general partners have non-passive losses in the year of the investment as a result of the deduction for intangible drilling costs and will have their net income from partnership wells following conversion to limited partner status characterized as non- passive income. IRC Section 469(c)(3)(B).

For independent producers, such as investors in an oil and gas partnership, the 1992 National Energy Bill repealed the preferences for excess intangible drilling costs and excess percentage depletion for natural gas and oil. Repeal of the excess intangible drilling costs preference, however, under current law may not result in more than a 40% reduction in the amount of the taxpayer’s alternative minimum taxable income computed as if the excess intangible drilling costs preference had not been repealed. IRC Section 57(a)(2)(E).

The costs of most equipment placed in service by a partnership will be recovered through depreciation deductions over a seven-year cost recovery period using the 200% declining balance method with a switch to straight Iine. The Tax Cuts and Jobs Act enacted at the end of 2017, increased first year bonus depreciation to 100%. The 100% bonus depreciation deduction remains in effect from September 27, 2017 until January 1, 2023. The deduction phases out over the following four years, dropping to 80% in 2023, 60% in 2024, 40% in 2025, and 20% in 2026. After 2026, Bonus depreciation is no longer available. Tax Cuts and Jobs Act Section 13201 and IRC Section 168(b) and (c).

In the case of marginal producing oil and gas wells, as that term is defined in the Code, there is allowed as a deduction from a partnership’s gross income from its natural gas and oil wells a reasonable allowance for depletion. The depletion deduction for marginal producing wells is equal to a percentage ranging from 15% to 25% of gross well income. IRC Sections 611, 613, 613 A(c)(6).

An investor general partner’s conversion to limited partner status should not have adverse tax consequences unless there is a reduction in the partner’s share of the partnership’s debt, if any, as a result of the conversion. Rev. Rul. 84-52, 1984 -1 C.B.157.

A Closely Held C Corporation is a corporation in which at any time during the last half of the taxable year more than 50% of its outstanding stock is owned, directly or indirectly, by or for not more than five individuals may offset passive activity deductions against passive activity income and net active income but not portfolio income. IRC Section 542 (a)(2) and 469(e)(2)(A).

This deduction created by the 2017 Tax Cuts and Jobs Act, allows non-corporate taxpayers to deduct up to 20% of their qualified business income (QBI), plus up to 20% of qualified REIT dividends and publicly traded partnership income. In general, total taxable income in 2023 must not exceed $182,100 for single filers and $364,200 for joint filers to qualify for the full 20% deduction. This tax break reduces and disappears once you hit a total taxable income of $232,100 and $464,200, respectively. IRC Section 199A.

Amounts paid during the tax year for drilling an oil or gas well are deductible in the year paid if drilling of the well commences before the close of the 90th day after the close of the partnership’s tax year. (RC Section 461(i)(2)(A).