It Pays to Invest in Oil and GasIntroductionAll investments are risky, and oil and gas investments have a reputation for being especially so. So why invest in oil and gas? One big reason: it’s an industry that enjoys tax incentives like no other.

Crowdfunding and online investing are improving how we invest in all sectors, but the tax incentives for oil and gas investing mean it remains among the best ways to reduce your tax bill.

YOU CAN DEDUCT 80-90% OF YOUR OIL AND GAS INVESTMENT THE FIRST YEAR AND UP TO 100% OVER FIVE YEARS.

If that seems to be too good to be true, we’ll explain how.

Why Do Oil and Gas Investors Get Special Tax Incentives? Oil and gas investing (like all investing) is inherently risky. However, the US depends on oil and gas to produce energy to power cities, states and homes. Without oil and gas, the economy would grind to a halt.

For many reasons, the federal government wants to encourage domestic production of oil — lessening dependence on foreign oil, stimulating the economy

and supporting smaller oil and gas producers.

So the government gives tax incentives to encourage investment in domestic production of oil and to offset inherent risks.

How Oil and Gas Investing Reduces Your Tax BillThere are three main ways to reduce your tax bill by taking deductions for oil and gas investments.

1. Intangible Drilling Costs

What are intangible drilling costs? These are the costs for things that you can’t reuse, such as labor, cement or drilling rig rentals.

How to Get Tax Benefits When You Invest in Oil and Gas

“I offset $250,000 of taxable income last year using my oil and gas tax investments.”

— Thomas, Nevada

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Intangible drilling costs make up about 80% of the total cost of a drilling project.

You can deduct 100% of intangible drilling costs in the year you incur them.

2. Tangible Drilling Costs

Tangible drilling costs include items that you can sell later, such as tanks, leasehold interests and wellheads.

They comprise about 15-20% of the costs of drilling the well.

UNDER A NEW 2018 LAW IN EFFECT UNTIL 2023, YOU CAN DEDUCT 100% OF THE TANGIBLE DRILLING COSTS IN THE FIRST YEAR.

3. Depletion Allowance

Once the oil well begins producing, you still have options to reduce your tax bill.

The IRS allows a 15% depletion allowance. This takes into account that over time wells produce less oil.

“TurboTax walked me through applying these deductions to my taxes, pretty straightforward.”

— Philip, Texas

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“I invested $25,000 last year in three projects and received an $18,000 IDC (intangible drilling cost) deduction to apply towards my taxes.”

— Joel, Washington

You can use the depletion allowance each year until the well no longer produces oil.

Bonus: Making the Investment Active

Tax Code: (Reg § 1.469-1T(e)(4)(i).)

If the investment is structured properly, an oil and gas investor can remain passive while taking advantage of the active investment benefit.

EnergyFunders lets you invest as a general partner (active) or limited partner (passive), depending on your tax goals.

The main reason to invest as a general partner is to be able to deduct your investment from active income. However, if you are a general partner, you have unlimited liability.

Note: The fund pays a commercial general liability insurance policy on each project that covers up to $7 million of liability. (If you invest as a limited partner, you deduct your investment from passive income and have limited liability.)

With EnergyFunders, you only participate as a general partner until the wells produce revenue. At that time, general partners convert to limited partners.

This allows you to gain tax benefits from being a general partner in the drilling phase but avoid self-employment taxes from being a general partner during the production phase.

ENERGYFUNDERS IS THE ONLY PLATFORM OFFERING THIS ADVANTAGE.

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The main reason to invest as a general

partner is to be able to deduct your investment

from active income. With EnergyFunders,

you only participate as a general partner until the

wells produce revenue. At that time, general

partners convert to limited partners.

Understanding the Numbers: An Example

What Does This Mean for You?

For example, John is an investment professional making $375,000 per year. He is married with one child, owns his home and contributes to a 401k. His income tax bracket is 32%.

With his basic tax deductions, he is paying over $100,000 per year in federal taxes. If John invests in five projects with EnergyFunders, allocating $25,000

this past year, and elects the general partner option to make his oil investments active and averages a 75% intangible drilling cost across all five projects, he gets about a 30% return on his investment year one. That doesn’t include any production results.

The tax benefits mean you get a return on investment even if you have a dry hole.

If you want to lower your tax bill, oil and gas investing is an easy and effective way to do it. Plus, it offers high return potential and can provide long-term cash flow. (Oil and gas wells can produce for 20 years or more.)

While oil and gas investing has advantages, the way you invest is critical to ensure that you can qualify for oil and gas tax incentives.

EnergyFunders’ platform allows you to invest directly into oil wells and to buy into projects with as little as $5,000 so you can diversify your risk.

It’s the only platform today that allows for smaller oil and gas investments while providing the proper structure for you to take advantage of all the tax benefits.

Total Investment

75% Intangible Drilling Costs Average

15% Tangible Drilling Costs

Year One Deductions

Total Realized Tax Benefit at 32%

(Not Including Production Results)

$25,000

$18,750

$3,750

$22,500

$7,200

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About EnergyFundersThe EnergyFunders platform allows investors the ability to diversify over more projects with lower buy-ins. All projects are vetted and complete a third-party engineering review to ensure investors the best chances to succeed as an oil and gas investor.

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(For informational purposes only. EnergyFunders LLC and its affiliates do not provide tax, legal or accounting advice. This material has been prepared for informational purposes only and should not be relied on for tax, legal or accounting advice. It should only be used to aid tax professionals who analyze and understand their clients’ individual tax circumstances. Consult your personal tax, legal, and accounting professionals before engaging in any transaction.)