Intangible Drilling Costs
The intangible expenditures of drilling (labor, chemicals, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are 100% deductible during thefirst year. (See Section 263 of the Tax Code.)

Tangible Drilling Cost Tax Deduction
The total amount of the investment allocated to the equipment is 100% tax deductible. Tangible costs may be deducted as depreciation over a seven-year period. (See Section 263 of the Tax Code.)

Tax Credits
Congressional incentives encourage domestic petroleum development. Congress has provided tax incentives to stimulate domestic natural gas and oil production. Several tax credits in relation to oil or natural gas production. The Enhanced Oil Recovery Credit is applied to certain project costs incurred to enhance a well’s oil or natural gas production. This credit is up to 15% of the costs incurred to enhance production. (See Section 263 of the Tax Code.)

Small Producers Tax Exemption
The “Small Producers Exemption” allows 15% of the Gross Income (not Net Income) from an oil and gas producing property to be tax-free.

Lease Costs
Lease costs sales expenses, legal expenses, administrative accounting, and Lease Operating Costs are 100% tax deductible through cost depletion.

Active vs. Passive Income
The Tax Code specifically states that a Working Interest in an oil and gas well is not a “Passive” Activity, therefore, deductions can be offset against income from active stock trades, business income, salaries, etc.