Tax Advantages & Type of Interests

Investor General Partner Interests

  • Tax Consequences. If you invest as an Investor General Partner, then your share of the partnership’s deduction for intangible drilling costs will not be subject to the passive activity limitations on losses. You may claim a deduction in an amount equal to not less than the percentage of your net subscription amount used to pay for intangible drilling costs for all of the wells to be drilled by the partnership in that taxable year. 

  • Unlimited Liability. If you invest as an Investor General Partner, you will have unlimited liability regarding the partnership’s activities. In addition, the Investor General Partners will have joint and several liability, which means, generally, that a person with a claim against the partnership and/or an Investor General Partner may sue all or any one or more of the partnership’s general partners, including you, for the entire amount of the liability. You will be able to determine if your Interests are subject to assessability based on whether you buy Investor General Partner Interests, which are assessable, or Limited Partner Interests, which are non-assessable. The Partnership intends to purchase an insurance coverage of a minimum of $10 Million dollars.

  • Conversion Your Investor General Partner Interests will be automatically converted by the Managing GP to Limited Partner Interests upon the occurrence of the earlier at the drilling and completion of all of the partnership’s wells, as determined by the Managing GP’s geologists, Once, your Interests are converted, you will have the limited liability of a limited partner. This event will not create any tax liability for the General Partners 

Limited Partner Interests

  • Tax Consequences. If you invest as a Limited Partner, then your use of your share of the partnership’s deduction for intangible drilling costs will be limited to offsetting your net passive income from “passive” trade or business activities. º Passive trade or business activities generally include the partnership and other limited partner investments, but passive income does not include salaries, dividends or interest. This means that you will not be able to deduct your share of the partnership’s intangible drilling costs in the year in which you invest, unless you have net passive income. 

  • Limited Liability. If you invest as a Limited Partner, then you will have limited liability for the partnership’s liabilities and obligations. This means that you will not be liable for any partnership liabilities or obligations beyond the amount of your subscription amount in the partnership and your share of the partnership’s undistributed net profits, subject to certain exceptions set forth in “Summary of Limited Partnership Agreement” of the PPM.

Tax Advantages Overview

O&G Investment is the last US Tax Shelter. Investment in the domestic O&G industry represents a significant U.S. policy priority to encourage less dependence on foreign oil, with unparalleled tax incentives offered by the U.S. government. 

To illustrate this point, the tax shelters of O&G investment were some of the only incentives to survive the Tax Reform Act of 1986.

In its Oil & Gas Handbook, the IRS states: “The importance of the petroleum industry to the economy of the United States has led Congress to pass specialized tax laws that are unique to the oil and gas industry. Petroleum industry accounting records have been adapted to the specialized nature of the industry. As a result, an efficient and effective examination of a return with oil and gas investments, transactions, or operations will require specialized knowledge of the industry, accounting, and tax law”

Among the significant tax benefits of O&G investment, the Tax Code allows:

  1. 100% lowering of tax through write-off of Intangible Drilling Costs;
  2. 100% depreciation of equipment costs; 
  3. Reduction in taxable income by 15% (the “depletion allowance”); and
  4. almost full deduction of an investment made late in the tax year.

Income derived from O&G investments is subject to federal taxes, and in some jurisdictions, state taxes. Tax law also varies depending upon whether investments are made by an individual or a business entity such as a corporation or partnership. 

The specific areas, which largely impact O&G investment taxation, include:

  • Intangible Drilling and Development Costs
  • Deductions
  • Timing
  • Alternative Minimum Tax
  • Depreciation of Equipment costs
  • The Depletion Allowance 
  • Sale of O&G Interests

Find out more: ask for our proprietary Tax brochure