In 1986, the U.S. Congress passed the Tax Reform Act. This Act makes a direct investment in domestic oil and gas one of the most tax-advantaged investments available to today’s investor. This act exempts oil and gas working interests from being classified as "Passive Income" (see Section 469(c)(3)) of the Tax Code).

Other major tax incentives available to oil and gas investors:

$ Intangible Drilling Costs (IDCs): For a producing well, 70% - 85% of your investment constitutes what are known as IDCs and are written off your ordinary income in the first year. 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.

$ Tangible Drilling Costs (TDCs): For a producing well, 15% - 30% of your investment constitutes which are depreciated over a seven-year period using the Accelerated Cost Recovery System (ACRS). TDCs include pipe, storage tanks, and wellhead equipment, capitalized and depreciated.

$ 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, therefore producing tax-sheltered income.

$ 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.

The above examples are for general information only and not intended to be construed as individual tax advice. Consult your personal tax advisor concerning the applicability and effect on your personal tax situation. Tax laws change from time to time and there can be no guarantee of the interpretation of the tax laws.