4 Reasons to Consider Oil and Gas Investments for Tax Savings - Part 4

Reason 4 - Wrapping It Up: Key Takeaways and Cautions on Oil and Gas Tax Strategies

Oil and gas investments shine through unique tax perks like depletion (deducting resource exhaustion), percentage depletion (a percentage-based ongoing write-off), and IDCs (immediate expensing of drilling intangibles).

Together, these tools can lower tax liability, accelerate deductions, and even generate benefits beyond your initial investment, making the sector appealing when aligned with long-term financial goals.

However, the tax landscape is anything but simple when considering oil and gas investments.

Here is a list of issues to look out for:

• Working interests produce non-passive income, allowing IDC deductions but potentially creating mismatches with passive investment income, resulting in potentially failing to use losses when you need them.

• Royalty interests are passive and can generate depletion, but they do not qualify for IDC deductions.

• Not knowing your passive and non-passive profile and blindly investing in oil and gas for the “deductions” can lead to suspended losses, complicated tax positions, or unintendedly triggering the 3.8% net investment income tax. I have seen ALL of the above happen, even with sophisticated tax return preparers who are unfamiliar with this specialized area of the tax code.

• State filing obligations can multiply quickly; for example, PTP income from states like North Dakota may involve withholding but still require your own state return filing.

• K-1s often lack consistent detail with non-standard depletion schedules, basis adjustments, or state allocations, which can lead to incorrect reporting and penalties.

And here’s the essential reminder:

Without proactive planning, you may face unexpected tax bills, unused passive losses, and complex, costly state-filing requirements that catch investors off guard. Combine that with the inherent production and commodity price risk in oil and gas, and it becomes crucial to reassess why you’re investing and whether the profile truly aligns with your financial objectives.

With years of experience in oil and gas taxation, from in-house corporate tax of a large oil & gas production company to public accounting, I have seen how effective planning can unlock benefits while avoiding costly mistakes.

If you’re considering an oil and gas investment or already receive K-1s, I can help review your strategy, ensure proper reporting, and identify opportunities to maximize tax efficiency while avoiding pitfalls.

Reach out for tailored guidance before making your next move.

Meliora Consulting PLLC | tax advisory