Wait, A Potential First Year Tax Deduction of Up to 100%? Here’s How High Income Earners Invest and Deduct
This year we’ve had a number of folks ask us about how they could reduce their tax bill for 2022. Of course, contributions into 401ks, IRAs, 403b, pension plans and more are deductible from income, but unless you own a business, you’re capped at the contribution limits. Let’s be honest here, a $7,000 IRA contribution isn’t really going to move the needle for people with a lot of assets.
So where does that leave investors who have high incomes? Where can they find some sort of tax reprieve? The good news is that if you’re an accredited investor (someone with a net worth of $1mm+ excluding their primary residence or who meets certain income thresholds), there are options out there that have the potential to help reduce your tax bill. In this article, we’ll talk about Intangible Drilling Costs.
Intangible Drilling Costs (IDC’s)
In the oil and natural gas industry, Intangible Drilling Costs, or IDC’s, are expenses that an operator incurs when setting up, laboring and drilling for the energy. Site preparation, equipment rentals, labor and administration costs aren’t a tangible asset, so they don’t have any value after a well is set up. For those types of costs that can’t be recouped, the tax code provides a deduction.
IDC’s have in some way or another, been a part of our tax code since 1913 which have given independent businesses the opportunity to explore and drill for American energy that may not have otherwise been made available. 90% of the oil and gas that is produced today in America is a result of some 7,000 independent oil and gas companies. For their efforts in searching for energy resources, these companies are able to write off a large part of the upfront costs which have the potential to be passed through to investors.
Once the drill rigs are in place and if any oil and natural gas is found, any revenue generated from the sale of the energy resources may also be passed to investors. Wells have 50 year lives, so investors could effectively receive any possible revenue for years, if not decades. Oil and natural gas is a commodity, so the price of the resources will fluctuate and be variable over time. Also, as the resources get depleted from the well, the amount of potential revenue would also drop because not as much is being produced and sold.
Environmental Impact and Sustainability
Naturally, many of the world’s largest oil and gas producers are feeling the pressure from investors to move toward renewable energy that is more sustainable and less impactful on the environment. Not only are investors looking for answers, governments are getting involved with environmental initiatives. Shell has been ordered by the Netherlands to reduce their carbon emissions 45% by 2030. Exxon Mobil has created a climate activist board. The point here is corporate responsibility is at the forefront of what investors are considering when making decisions and the oil and gas industry is making an effort to meet those demands.
Conclusion
In summary, IDC’s have the potential to provide high income, accredited investors with a first year tax deduction of up to 100% of what is invested. Any revenue produced by the sale of the energy resources might possibly be passed through to investors as well. It's important to understand we’re not tax advisors, nor do we pretend to be. These funds are inherently risky, so it’s important to speak with your financial professional to see if something like this would make sense for your situation