Tax Deduction Example
BEFORE Investing with StrongHeart Energy
| Income | $1,000,000.00 |
|---|---|
| Tax Bracket | 37% |
| Tax Liability | $370,000.00 |
AFTER Investing with StrongHeart Energy
| Income | $1,000,000.00 |
|---|---|
| StrongHeart Investment | $200,000 |
| 85% First Year IDC Tax Deduction | $170,000 |
| Taxable Income | $830,000 |
| Tax Bracket | 37% |
| Tax Liability | $307,100.00 |
| First Year Tax Savings | $62,900.00 |
| “At Risk” Investment | $137,100.00 |
The hypothetical scenario above shows how a qualified investor could:
- Significantly reduce their tax liability - in this case by 17%
- $200,000 investment, 'returned' $62,900 (or 31.45%) through tax savings
| $200,000 | Initial Investment |
|---|---|
| 85% | IDC’s |
| 37.0% | Tax Bracket |
| $62,900.00 | Real Dollar Savings |
Tax Bracket: 31.45% return of investment from the tax benefit alone
This illustration is being provided with the following assumptions: (i) the Partnership's tax deductions will equal 85% of the investment it receives from investors, (ii) oil is priced at $75 bbl, and (iii) certain Partnership expenses, including but not limited to drilling and completion, will be immediately tax deductible in the current calendar year. In the event that the Partnership's tax deductions are less than 85% or oil prices are different, actual results may differ from these projections. Some or all expenses may not be immediately deductible in the year of investment. The realization and timing of tax benefits and return on investment will depend on the specific facts and circumstances of the investor and the investment, and investors are urged to consult their own tax advisors.
Tax documents
A K-1 form is a crucial tax document for investors in oil and gas partnerships, providing detailed information about their share of the partnership's income, deductions, credits, and other financial items.
The K-1 form, officially known as IRS Schedule K-1 (Form 1065), is used to report the income, losses, dividends, and other financial details of partnerships to the IRS. Each partner in the investment receives a K-1 form, which they use to report their share of the partnership’s income and deductions on their individual tax returns.
Investing in oil and gas partnerships provides several tax benefits, which are detailed on the K-1 form. Invest Now to get started.
Why Consider Oil & Gas Investments?
Investing in oil and gas offers a tax-efficient opportunity for investors to benefit from a high-demand resource used in transportation, heating, cooling, manufacturing, and other energy-intensive activities.
- Tax Benefits: Investors receive significant tax deductions and amortization opportunities.
- High Demand: Oil and gas investments tap into a resource essential for multiple sectors.
- Active Investment: Classified as active, these investments offer flexible income offset options and tax exemptions.
Oil and gas investors can reduce their taxable income through deductions for exploration and development costs, leading to lower overall taxes. Some tax credits are available for new oil exploration projects, providing further income tax relief. Special provisions in the U.S. tax code also allow investors to exclude a portion of their profits from taxation under certain conditions. Consult your tax advisor for detailed information.
Examples of Potential Benefits of Investing in Oil and Gas
The Tax Reform Act of 1986 ensures that oil and gas ventures remain tax-advantaged investments, exempting them from being classified as "Passive Income". Unique tax advantages in the industry include:
- Intangible Drilling Costs: 100% tax deductible in the first year.
- Tangible Drilling Costs: Fully deductible.
- Depletion Allowance: 15% of gross production revenue is tax-free.
- Active Income Deductions: Can be offset against various income sources like business income, salaries, and interest.
Intangible Drilling & Development Cost Tax Deduction
Intangible Drilling Costs (IDC) cover non-physical expenses associated with drilling and completing a well, such as mobilization fees, rental fees, crew wages, site preparation, and other related services. A significant portion of the investment in an oil and gas project is IDC, which may be 100% deductible in the year paid.
Tangible Drilling & Development Cost Benefits
Tangible Drilling Costs (TDC) include physical components used in well drilling and completion, like drill bits, pipes, casings, and cement. These costs can be amortized and depreciated over 5-7 years, helping investors gauge potential returns, compare project cost-effectiveness, and manage unexpected expenses.
Small Producers Tax Exemption
The 1990 Tax Act introduced the "Small Producers Exemption," allowing 15% of an investor’s gross income from an oil and gas property to be tax-free, subject to limitations. This benefit is not available to large companies or those with significant oil and gas production. Investors in qualifying joint ventures should claim this exemption on their annual tax return.
Oil & Gas Investments are not Passive Income
The Tax Reform Act of 1986 distinguishes between passive and active income, preventing the offsetting of losses from passive activities against active income. A working interest in an oil and gas drilling program is considered an active investment, allowing deductions to be offset against business income, salaries, and other active income sources.
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848 Brickell Ave ph5, Miami, FL 33131, USA
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