Why the U.S. Government Rewards You for Drilling.
The federal tax code offers some of the most generous incentives in any asset class to encourage domestic energy production. Working interest investors may deduct the majority of their year-one capital against active, non-passive income.
Tax outcomes vary. Consult your CPA.
The Majority of Your Year-One Investment May Be Deducted Against Ordinary & Active Income.
Under IRC §469(c)(3), working interest holders in domestic oil & gas may write off drilling and completion costs directly against active, non-passive income — not just investment gains.
Three categories, three tax treatments
Every dollar spent to drill, complete, and produce a well falls into one of three buckets — each with its own treatment under the Code.
Intangible Drilling Costs (IDCs)
Money spent on the well that has no salvage or resale value — labor, fuel, chemicals, and drilling services.
- 100% deductible in year one
- Offsets active & ordinary income
- IRC §263(c)
Tangible Drilling Costs (TDCs)
Equipment with salvage or resale value — wellheads, casing, tubing, pumps, and tanks. Up to 100% depreciable year one.
- Bonus depreciation may apply
- Offsets active & passive income
- IRC §168(k)
Depletion Allowance
Because oil & gas wells are a depleting resource, an allowance equal to 15% of gross production income is tax-free each year.
- 15% of gross income each year
- Continues life of the well
- IRC §613A
IDC + TDC + ongoing depletion — potentially every dollar invested may be deductible over time.
A $200,000 Working Interest — Year One
A simplified illustration of how year-one deductions may reduce a high-earner's taxable income.
- W-2 Income
- $400,000
- Taxable Income
- $400,000
- W-2 Income
- $400,000
- IDC Deduction (Drilling)
- ($130,000)
- TDC Deduction (Equipment)
- ($60,000)
- Lease ($10k)
- depreciated over time
- Net Taxable Income
- $210,000
Simplified hypothetical for illustration only. Actual results vary by circumstance, tax bracket, and state. Consult a qualified tax professional.
Year-One Savings at Different Investment Sizes
Same 5% lease / 65% IDC / 30% TDC allocation, applied to three investor profiles.
- Lease (5%)
- $5,000
- IDC Deduction (65%)
- ($65,000)
- TDC Deduction (30%)
- ($30,000)
- Year-One Deductible
- $95,000
- Tax Before
- $105,000
- Tax After
- $71,750
- Lease (5%)
- $10,000
- IDC Deduction (65%)
- ($130,000)
- TDC Deduction (30%)
- ($60,000)
- Year-One Deductible
- $190,000
- Tax Before
- $148,000
- Tax After
- $77,700
- Lease (5%)
- $25,000
- IDC Deduction (65%)
- ($325,000)
- TDC Deduction (30%)
- ($150,000)
- Year-One Deductible
- $475,000
- Tax Before
- $333,000
- Tax After
- $157,250
Allocations, rates, and results are hypothetical. Actual allocations vary by project and are disclosed in each Private Placement Memorandum.
Income These Deductions May Offset
Working interest holders may apply deductions against nearly every category of ordinary and active income.
Active, Not Passive
Working interest is treated as active income under §469(c)(3) — the deductions flow against W-2 and business income.
Written Into The Code
IDCs, TDCs, and percentage depletion have been part of U.S. tax policy for nearly a century to secure domestic supply.
Documented By The Operator
You receive a K-1 breaking out IDC, TDC, and depletion for your CPA — no reconstruction required at tax time.
Important Tax & Legal Disclaimer. The information on this page — including any references to the Internal Revenue Code (IRC §§ 263(c), 291, 469(c)(3), 611–613A, 1254 and 168(k)) — is provided solely for general educational and illustrative purposes. It is not tax, legal, accounting, investment, or financial advice.
No Guarantee of Any Deduction or Result. Rise Capital Group and its affiliates do not guarantee the availability, amount, timing, character, or continued deductibility of any IDC, TDC, depreciation, depletion, or other tax benefit described herein. Whether an investor may claim any such deduction depends on the investor's form of ownership, material participation, at-risk basis, passive activity limitations, AMT, NIIT, state and local rules, entity structure, and future changes in law.
Investment Risk. Oil and gas working interest investments are speculative and involve a high degree of risk, including risk of loss of the entire amount invested. This page is not an offer to sell or a solicitation of an offer to buy any security. Any offering will be made only to verified accredited investors pursuant to a confidential Private Placement Memorandum.