What if I told you that the U.S. government may reimburse you for a considerable portion of the costs of developing an oil and gas project, while letting you retain full ownership of the investment?
That’s exactly what’s happening today, as part of a nationwide economic stimulus program. Depending on your tax bracket, Uncle Sam could fund up to 30% of your next oil and gas project, or possibly more. And it won’t last long. The window of opportunity closes in less than six months. So let’s get right to it – here’s how it works…
Special Tax Break as Part of COVID-19 Stimulus Program
In response to the unprecedented economic fallout from the COVID-19 pandemic, congress recently passed the CARES Act legislation. The Act helps a wide range of individuals and businesses, but it offers particularly generous benefits to oil and gas investment partnerships.
The key provision of interest deals with net operating loss (NOL) carrybacks – a tax benefit the IRS terminated in 2018. The Act temporarily re-establishes and enhances (NOL) carryback provisions, allowing individuals and companies to recover 100% of any losses incurred in the 2017-2020 tax year, using income taxes paid out over the preceding five years. See Bloomberg Article
Now, here’s why this offers a potential windfall for oil and gas partnerships…
Unlike most businesses that capitalize their expenses, direct oil and gas investors can treat 100% of the intangible drilling costs (IDCs) as losses in the current tax year. In some cases, these IDCs represent up to 90% of the entire investment into an oil and gas project. That means the U.S. government could fund a substantial portion of any investment you make into an oil and gas partnership in the 2020 tax year.
Consider an example…
A $1 Million Oil Well for the Cost of $700,000
Let’s say you paid out $1 million in taxes from 2014 – 2019, and you have no other businesses with operating losses in 2020 that will claw-back your prior five years of paid-up income taxes. You could allocate $100k into a direct investment into an oil well offering monthly income potential.
In this scenario, you can claim $100,000 in operating losses in 2020. With the new CARES Act provisions, you can then go back five years in time and reduce your taxable income by $100,000. Assuming a 30% tax bracket over the last five years, Uncle Sam will then send you a check for $30,000 next year. The end result: a $100k investment for a net cost of just $70,000.
As you can see, the CARES Act legislation offers incredible benefits for direct investments into oil and gas partnerships. Projects like the Buffalo Ridge & Llama – where most of the investment dollars go towards IDCs – are perfectly structured to exploit this opportunity.
Importantly, we’re not tax experts – so please consult with your CPA or tax advisor for what makes sense in your personal tax situation. But we’re here to provide any information that can help you take advantage of this special situation. As always, feel free to reach out to me or Dennis with any questions.
Sean (307) 622-1645