Tangible Drilling Costs (TDC) are expenses associated with the physical aspects of drilling for oil and natural gas. These costs are directly related to the actual drilling operations and typically represent a significant portion of the overall expenses in oil and gas exploration and production. Tangible Drilling Costs include various tangible, physical components and services necessary for drilling a well. In this blog, you’ll learn about TDCs as well as tangible drilling costs tax treatment.
The following list of tangible drilling costs is not intended to be exhaustive, but to provide some examples.
Regarding tangible drilling costs tax treatment in the United States, tangible drilling costs are typically fully deductible in the year they are incurred. These costs can be written off as operating expenses rather than capitalized as a capital expenditure. This immediate deduction provides a significant tax advantage for oil and gas companies engaged in exploration and drilling activities.
The deduction for tangible drilling costs is usually claimed in the year the expenses are paid or incurred, even if drilling does not begin until March 31st of the following year.
It’s important to note that certain limitations or restrictions might apply, and tax regulations can change over time. Additionally, there might be specific rules or qualifications related to different types of drilling activities or entities involved in the exploration and production of oil and gas.
Tax treatment can also vary based on factors like the type of entity (individual, partnership, corporation) and whether the project qualifies for certain tax incentives or exemptions. As tax laws can be complex and subject to changes, it’s advisable to consult with a tax professional or accountant who specializes in oil and gas tax matters for specific and up-to-date guidance.
We have a Hypothetical Tax Deduction Calculator that you can use to learn more about the tax benefits of tangible drilling costs. With our calculator, you can see how much an accredited investor could potentially reduce their tax liability with a direct investment in an oil and gas project.
Tangible Drilling Costs are an essential component of the overall cost structure of a project in the oil and gas industry. They are used by investors and operators in the industry to determine the tax deductions and incentives that can be claimed for drilling activities, thus reducing the overall tax burden. By distinguishing between tangible and intangible drilling costs, companies can calculate their tax liabilities more accurately. Intangible Drilling Costs (IDC) represent non-physical expenses, such as labor, surveying, and engineering, which are also deductible but treated separately from TDC in tax calculations.
The above blog is provided for general information only. This information is not intended to be individual advice. Prospective participants should consult with their personal tax professional regarding the applicability and effect of any and all benefits for their own personal tax situation. In addition, tax laws change from time to time, and there is no guarantee regarding the interpretation of any tax laws. For more information, please visit www.irs.gov.