1. Intangible Drilling Costs(Anything not reusable during drilling) Represents largest tax deduction in an oil and gas investment. Up to 70% of investment can be written off in the year wells are drilled.
2. Tangible Drilling Costs
Just the opposite of IDC's, anything that is not reusable (i.e., equipment and depreciation)
3. Depletion Allowance
Account for the reduction (production) of reserves as a product is produced and sold. This represents up to 20% of the net income received.
Tax Advantage Example