By directly participating in oil and gas investments, you are entitled to many substantial tax benefits. Immediately, you gain an upfront deduction on intangible drilling costs, significantly reducing your capital investment risk. This deduction is seen on your federal tax return and, in certain cases, on your state income tax return. Please see below for a summary of all potential tax benefits.

***Note that this information is provided for informational purposes only and we very strongly advise every potential investor to first consult with their tax advisor.

SUMMARY OF TAX BENEFITS:

• Intangible Drilling Costs: A 72% to 82% investment write-off can be expected in the first year based on intangible drilling costs. Investment in the drilling portion of the well is done upfront before operations begin and the related deduction is taken in the same tax year the costs occurred, depending on the accounting method used.

• Intangible Completion Costs: Any non-salvageable completion costs, including labor, materials, rig time and fluids, are generally considered intangible completion costs. These costs generally account for 15% of the total investment and are usually deducted in the year they occur, depending on the accounting method used.

• Tangible Drilling Costs: The costs of any salvageable equipment used in the building or production of a well, such as casings, tanks, well heads, trees and pumping units, are generally considered to be tangible drilling costs. These costs typically depreciate over seven years and account for about 18% to 28% of the total well cost.

• Depletion Allowance: A portion of the gross income gained through the sale of oil or gas once a well is in production can be sheltered through a depletion deduction. Generally, up to 15% of the annual well production can be sheltered. The first type of depletion deduction, cost depletion, is calculated as the relationship between current production as a percentage of total recoverable reserves. The second type of depletion deduction, statutory deduction (also known as percentage depletion) is subject to various qualifications and limits.

• Tax Credits: Several tax credits have been passed by Congress, including the enhanced oil recovery credit and the non-conventional fuel source credit. The enhanced oil recovery credit is applied to up to 15% of the project costs used to improve oil and gas production. The non-conventional fuel source credit applies to certain qualified fuels, such as oil shale, some synthetic fuels derived from coal and tight formation gas. This credit generally equals $3 per barrel of oil equivalent.

• Alternative Minimum Tax: In the 1990’s, Congress provided some tax relief for independent producers (defined as individuals or companies with a production rate equivalent to or less than 1,000 barrels per day). This helped reduce and/or prevent taxation under the Alternative Minimum Tax applied to excess intangible drilling costs. It should be noted that percentage or statutory depletion is no longer considered a preference item.

Lease Operating Expenses: Daily costs related to well operations and costs of re-entry or the re-work of an existing well are generally considered lease operating expenses. These expenses are usually deductible in the year in which they occur and should not result in any Alternative Minimum Tax consequences.

MORE TAX DEDUCTION INFORMATION

For complete details on the tax deductions you can take advantage of by investing in the oil and gas industry, we highly recommend contacting your tax advisor. To get more information on partnering with JW Bosque Energy, please see our Partners page or contact us today.