Oil and Gas Investment Benefits:
With today’s advanced technology and high economic upside potential associated with drilling for oil and gas coupled with the available tax benefits, WPC believes there has never been a better time for investors to position themselves in an investment in this industry.
With WPC’s Industry Partners and over 100 years of combined oil and gas exploration and production experience, the Company believes it offers excellent alternative income investments with tax favoritism for its existing and potential Investors.
- Potential Returns: Projected returns of up to five times, or more, of the initial investment are common in the industry. Although sometimes high risk in nature, oil and gas exploration and development can be highly profitable.
- Rapid Results: Monthly revenue checks to Investors can begin within 90 days of a well hitting, a rapid pace for an investment offering such high projected returns.
- Technological Advancement: The oil and gas industry is one of the largest users of advanced technology. Billions of dollars are spent each year to reduce the investment risk associated with establishing productive wells. With modern day advancements, it is easier to find oil and gas than ever before. Technology, rather than luck, is what has allowed the industry to continue to meet the rapidly increasing demand for oil and gas from China, India and other developing nations which compete for fuel supplies in the world markets.
- *Tax Advantages: Investing in oil and gas can be one of the most tax-advantageous investments available.
Congressional incentives encourage domestic petroleum development. Oil and Natural Gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign sources. In light of this, Congress has provided tax incentives to stimulate domestic Oil and Natural Gas production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not “Loop Holes” – they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.
- Active vs. Passive Income: The Tax Reform Act of 1986 introduced into the Tax Code the concepts of “Passive” income and “Active” income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” Activity (Limited Partners excluded), therefore, deductions can be offset against income from active stock trades, business income, salaries, etc.
- Depletion Allowance: If you are an investor in an independent oil and gas project, the current depletion allowance is 15% of your share of the gross income from the property based on average daily production, up to the depletable oil or natural gas quantity. This makes fifteen cents of every gross income dollar non-taxable, thereby producing tax-sheltered income.
- Small Producers Tax Exemption: The 1990 Tax Act provided some special tax advantages for small companies and individuals. This tax incentive, known as the “Percentage Depletion Allowance”, is specifically intended to encourage participation in oil and gas drilling. This tax benefit is not available to large oil companies, retail petroleum marketers, or refiners that process more than 50,000 barrels per day. It is also not available for entities owning more than 1,000 barrels of oil (or 6,000,000 cubic feet of gas) average daily production. The “Small Producers Exemption” allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.
- Intangible Drilling Costs (IDCs): IDCs include labor-intensive costs such as the drilling contractor and professional services, and are reported to the investor at the end of the year. For a producing well, up to 85% of the investment constitutes what are known as IDCs and are written off an investor’s ordinary income in the first year.
Typically most of the investment is deductible in the same tax year and can be offset against active or ordinary income (salaries, business income, stock trades, etc.). For every dollar of IDC invested, the investor receives one dollar of deduction. These IDC deductions reduce an investor’s dollars at risk.
•IDCs can make up roughly 70-85% of the total investment.
By way of illustration, an investment of $100,000 made in an oil and gas partnership could yield up to $85,000 in tax deductions for the year the investment is made. For an investor in a 35% tax bracket, that could mean actual tax savings of up to $29,750 in the first year.
•The IDC deduction, a non-preference item, reduces the investors Adjusted Gross Income and lowers the Alternative Minimum Tax.
- Tangible Drilling Costs (TDCs): TDCs include pipe, storage tanks, and wellhead equipment which are capitalized and depreciated. For a producing well, approximately 15% – 30% of your investment constitutes TDCs, which are depreciated over a seven-year period using the Accelerated Cost Recovery System (ACRS).
- Dry Hole: In the event that you invest in a nonproducing well, 100% of all dollars invested are written off as a loss against your ordinary income in the first year.
- Lease Costs: Leasehold costs (purchase of leases, minerals, etc.), legal expenses for title opinions, etc., administrative, accounting and Lease/Well Operating Costs (LOC) are also 100% tax deductible through cost depletion.
- Alternative Minimum Tax: Prior to the 1992 Tax Act, working interest participants in oil and gas ventures were subject to the normal Alternative Minimum Tax to the extent that this tax exceeded their regular tax. This Tax Act specifically exempted Intangible Drilling Cost as a Tax Preference Item.
“Alternative Minimum Taxable Income” generally consists of adjusted gross income, minus allowable Alternative Minimum Tax itemized deduction, plus the sum of tax preference items and adjustments. “Tax preference items” are preferences existing in the Code to greatly reduce or eliminate regular income taxation. Included within this group are deductions for excess Intangible Drilling and Development Costs and the deduction for depletion allowable for a taxable year over the adjusted basis in the Drilling Acreage and the wells thereon.
Oil and Gas Investment Risks:
- Drilling a Dry Hole: In oil and gas drilling, as in real estate, it’s all about location, location, location. If the hole comes up dry, the investor will lose their entire investment (but can write off 100 percent of costs).
- Price Volatility: The profitability of oil and gas projects depends on the market prices of oil and gas vs. the cost of a drilling venture. Many investors make the common mistake of basing their investment decision solely on the price of oil or natural gas as opposed to also analyzing the costs associated with drilling and the projected amount of recoverable reserves. These additional factors are critical in the overall return on their investment.
The costs associated with drilling for oil and gas generally coincide with the market prices of oil and gas (i.e. if oil and gas market prices decline so do the costs associated with drilling projects and visa versa). Investors should carefully analyze the costs associated with drilling compared to the market price for oil and gas because price swings can occur and can impact the profitability of a project.
- Scams or Bad Company Management: As in all investments, there are scams and schemes to take advantage of investors in the oil and gas business, so investors must ensure that they fully understand any contracts or agreements. Success relies greatly on the management of the company, so in depth due diligence on the companies involved is a must.
*Potential and existing oil and gas Investors should consult with their Financial Advisor regarding tax deductions/benefits prior to making any investment in an oil and/or natural gas drilling project.