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Project Ozona Economic & Technical Review[8167]


Appendix 38

United States Tax Treatment for Oil & Gas Intangible Drilling Cost and Other Deductions (1) Oil and Gas investments in the United States have significant tax advantages relative to other industries. The motivation behind this beneficial tax treatment is to encourage constant re-investment into the sector, which requires substantial capital expenditures to maintain oil & gas production levels ■ Intangible Drilling Cost (IDC) Deduction ▬ ▬ ▬ Standard O&G Deductions Normally represents ~75% of the total cost to drill and complete a new well These costs are deductible against active, passive and/or portfolio income so long as the taxpayer has ownership in real oil & gas properties 70% to 80% of IDCs are deductible in the first year the costs are incurred, which provides a substantial tax shield when a new producing well is at is peak production (primary revenue producing year) O&G Tax Advantage Example ■ Tangible Drilling Cost Deduction ▬ ▬ Normally represents approximately 25% of the total cost to drill and complete a new well This amount can be deducted over a 5 year period ■ Depletion Allowance ▬ Currently, the depletion allowance provides for an additional 15% deduction. • Thus, 15 cents of every income dollar is tax free, providing tax-sheltered income 1. Please consult a tax expert regarding the aforementioned tax benefits, which may affect individual investor’s unique tax situation differently 39

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