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Intangible Drilling Cost (deductible in full) In the process of drilling a well,
there are certain expenses incurred that have no salvage value. They may be
labor, drilling expenses, testing, etc. These expenses generally represent from
40 to 60 percent of the total cost of the well. The investor's proportionate share
of these intangible expenses can be deducted as a cost of operation in the year
in which they were incurred. Further reference: Sec. 263a of the 1986 Internal
Revenue code.
Intangible Completion Costs These are treated the same as intangible
drilling costs. These are approximately 10 to 15 percent of the cost of the well.
Depreciation Equipment used in the completion and production of a well -
pumping units, tanks, well casing and any other physical equipment - is
depreciated over a seven-year life under the new Modified Accelerated Cost
Recovery System (MACRS).
Tangible Completion Expenses These usually represent 25 to 40 percent of
the total cost of the well.
Depletion Allowance Fifteen to 20 percent of the gross annual income from
the production of a well is tax free revenue (according to IRS guidelines on
producing heavy oil or stripper wells from 1993 forward).
Alternative Minimum Tax The percentage of depletion allowance for
independent producers or investors is no longer a tax preference item for the
Alternative Minimum Tax (effective for tax years beginning after 12/31/92).
Percentage depletion has been repealed as a preference item.
