Tax Benefits for Investing in Oil

oil investing


Investing in the fuel industry is a great venture, especially for portfolio diversification. This is because it comes with lots of benefits such as a high return on investment, a strong and consistent cash flow, and high investment life.

Government support in form of oil investment tax benefits is the greatest of them all. The government uses this strategy to attract potential and qualified investors to this great venture in the oil industry. These benefits granted by the government are of various types and they all function differently.

The tax benefits of investing in oil include the following:

1. Tax Exemptions for Small Producers

According to the act passed in 1990, small oil producers and persons are to be exempted from paying duty. This act was majorly amended to be a law specifically to lure individuals to invest in the oil industry. Large producers who generate an average of 50,000 barrels of oil are not categorized to enjoy the tax exemption benefit.

This is because these producers generate a lot of oil and this translates to a large profit margin. Also, the country will lose a lot of revenue from taxes if these producers are exempted from paying duty as the oil industry has a lot of demand hence the increased sales and production.

This type of tax benefit extended to small producers is referred to as percentage depletion allowance. The producers generating less than 1,000 barrels of fuel are the only beneficiaries here. Those producing more than this amount do not get to enjoy the benefit.

According to the act, a gross income of 15% from the wells generating gas and fuel, there should be no tax charged. It is significant to note that small producers’ tax exemption applies to fifteen percent, not of the net income but the gross income. Read more here

2. Tax Deduction on IDC

IDC in full means the Intangible Drilling Costs. These expenditures add up to a total of sixty-five to eighty-five percent of the total drilling costs. And they include the following: grease used to run the oil drilling machines, mud found when drilling, chemicals used in the drilling tools and equipment plus the labor workforce that perform all these processes.

These types of costs are usually a hundred percent deductible in year one of investment. For instance, an $80, 000 speculations may produce a maximum of $60, 000 in intangible drilling costs in year one of the investment. These tax deductions dully apply to the year the investment was made regardless of whether the oil well has started producing fuel or not.

So, if you thought that the time the deductions will be made is when the oil drilling process starts, then you are wrong. The tax code, section 263 explains well how these deductions work. So, before making an investment in the oil industry, it is essential to go through that section of the tax code to know more about tax deductions on intangible drilling costs.

3. Tax Deductions TDC

Tangible Drilling Costs include the total amount of money spent on purchasing the tools and equipment used in drilling the oil. These types of expenditures are also applicable to the hundred percent tax deduction.

The remaining twenty dollars in the instance provided above is the tangible drilling expenditure that is deducted in form of depreciation. These deductions can go for as long as seven years.

The tangible drilling costs are also explained well in the tax code, section 263. If you want to be an investor in the oil industry, this section is a must-read so that you can be well equipped with how the deductions are made as depreciation and the reason for doing the deductions for seven years. Click here to read more.


The tax benefits of oil investment are very essential to producers and investors. These benefits ensure equality between the large-scale producers and the small producers to guarantee they both gain from oil investments. It is significant to keep in mind that the tax benefits are offered by the government. They do this to lure investors to put their resources into oil investments. This works well as every individual loves incentives. Although the investors are loyal to their government and would like to pay tax to generate revenue for their country, tax benefits are advantageous and they are likely not to miss out on these opportunities.

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