Copyright Forbes
Before I owned my own company, I was an oil investor, and I’ve seen my fair share of losses. As a result, I’m particularly attuned to the risks people take when they decide to invest in an oil and gas business, whether it’s my own or someone else’s. This led me to become incredibly transparent about any possible problems whenever I speak to potential investors in my company, so I know they’re well aware of any risks involved. Still, people may be hesitant to invest for one reason or another, even though the potential benefits can be quite lucrative. So let me try to calm your fears a little bit. I would like to take a moment to discuss the benefits of investing in oil and gas, as it could significantly improve your portfolio. The Tax Benefits While it might not seem like it on the surface, there are tax benefits to investing in an oil and gas company. Let’s start with the intangible and tangible drilling costs. When it comes to the former, this includes every item involved in the process of drilling a well, excluding the drilling equipment itself. These are things like labor, mud, grease, and everything else you can think of. These make up about 60 to 80 percent of the cost of drilling a well, so it’s not a small item on the balance sheet, but they’re also 100 percent deductible in the year in which they occurred. So let’s say I want to drill a well, and it costs me $1 million. If 80 percent of that were these intangible costs, then the investor would get an $800,000 deduction. Notice that there’s nothing in here about whether or not it worked, and you’ve struck oil. As long as the rig starts its operations by March 31 of the following year, you can get those deductions. Tangible drilling costs are the remaining ones, and this time, it’s only the cost of the drilling equipment. Here, you also get 100 percent deductible expenses, but there’s a difference: they have to be depreciated over a seven-year period. Now let’s go back to that $1 million well I wanted to drill. If 80 percent of the costs were intangible, the remaining 20 percent would be tangible, and that’s $200,000. That $200k could be written off on a seven-year schedule, which means roughly $28,571.43 could be accounted for each year. That’s not too bad. There’s one other part, too: Not every well produces oil every year. That means you can write them off as an ordinary loss against ordinary gain for any year investment in that well is incurred. Income Now, some people may think that having a working interest in an oil and gas drilling operation could be a form of passive income. After all, you’re not doing any actual labor on your part. However, the tax code says the opposite and defines it as active income. Your instinct might be to see this as a bad thing, but it’s very much not. If drilling wells incurs any losses, that can be offset against your other forms of income, whether it’s wages, interest, or capital gains. Let’s put this into context, then. Should you decide to invest in an Allied Resource well and things do not go as planned, the activity incurs losses. Those losses can be deducted against your other income in your portfolio, which can give you a net win. One other key thing to note: I work with my securities attorney on every project to establish limited partnerships with our investors. That means you get all of the aforementioned tax benefits, but also a monthly income when oil is sold. That’s not a bad plan at all. It’s Your Choice I have a clear stance on investing in oil and gas, but ultimately, whether or not you want to include it in your portfolio is up to you. Were we in the same room, standing face-to-face, I would ask you the same thing I ask everyone: “If this doesn’t work out and you lose your investment, will this affect your lifestyle?” How you answer directs where we go next. If you’re a “No,” then let’s move forward. If you’re a “Yes,” then let’s shake hands and part ways as friends. No big deal. If you’re in the “No” category, then let’s start off with a more modest investment. In my opinion, you have to jump into the water to learn how to swim, and this is no different. With that in mind, it’s time to get your feet wet.
