Question 1

What are IDCs and can they be deducted against any kind of income?

Accepted Answer

IDCs (intangible drilling costs) are oil-and-gas drilling expenses without salvage value, such as labor and supplies, that may qualify for immediate deduction. Qualifying nonpassive working-interest deductions may offset wages, investment income and capital gains, subject to basis, at-risk, excess-business-loss, and alternative minimum tax rules.

Question 2

What is the difference between intangible and tangible drilling costs?

Accepted Answer

Intangible drilling costs are expenses with no salvage value, such as labor, fuel, chemicals and site preparation, and they often make up most of a well's cost. Tangible drilling costs are for equipment that can be reused or resold, such as pipe and wellheads. Tangible costs are generally depreciated over several years rather than deducted right away.

Question 3

What is a working interest?

Accepted Answer

A working interest is an ownership share in an oil or gas well that carries a share of the costs of drilling and operating it, along with a share of the revenue. A royalty interest receives revenue without paying costs. Working interests held without limiting liability are generally treated as nonpassive, which is why their deductions can offset other kinds of income.

Question 4

What other tax benefits do oil and gas investments offer?

Accepted Answer

Beyond the deduction for intangible drilling costs, eligible investors may claim the percentage depletion allowance, which lets them treat a portion of production income, often 15%, as tax-free. Tangible equipment can be depreciated. These benefits depend on the investor's structure and tax situation, so a tax advisor should confirm how they apply.

What are IDCs and can they be deducted against any kind of income?