Oil & Gas Well Investing Tax Deductions: What Investors Need To Know About Working Interest

Working Interest Investments Oil Wells What Investors Need To Know

ARTICLE Jan 3, 2024

If you have been wondering if you should make an investment in oil and gas well working interest to receive tax deductions this year, here are some questions to ask yourself and a few important factors to take into consideration.

While the world of investing in oil and gas wells may seem daunting to investors new to the energy sector and alternative investments, learning how to invest in these tangible assets and reap the rewards of highly sought after federal tax deductions the from Internal Revenue Service is rather easy. If you have been wondering if you should make an investment in oil and gas well working interest to receive tax deductions this year, here are some questions to ask yourself and a few important factors to take into consideration.  


In oil and gas investing, the highest asset class that offers sought after tax write offs is participating in the drilling and completion of wells known as “working interest participation.” 
Working interest is a type of investment in which an investor holds an ownership stake in an oil or gas asset and shares in the costs and profits of the asset. In a working interest investment, the investor has the right to participate in the exploration, development, and operation of the asset and may also be responsible for a portion of the costs associated with these activities. 
The name itself implies to the investor the scope of their investment – your money and invested capital will be working to generate a profit. Thus, the IRS sees working interest to develop oil and gas reserves in the United States as a benefit to the US economy. The IRS provides these deductions for working interest participants as a means of attracting capital to a national interest – producing oil and gas wells. 


In a working interest participation, tax deductions may include expenses related to exploration, drilling, and production, such as equipment purchases, leasing fees, and employee salaries.  
To qualify for a tax deduction in working interest investments, investors must have their capital “at risk.” It’s important to understand that this deduction is not accessible through direct energy asset participation in public companies, oil and gas public stocks, royalty trust companies, or midstream energy companies. 
The IRS offers tax benefits to investors who are willing to assume risk, engage in direct participation, and contribute to the growth of their income and asset base, thereby benefiting both the IRS and the federal government more profitably.  


Complicated energy acronyms and names can be deceiving to potential investors and run off those who qualify and are seeking oil and gas investments through direct ownership as well as tax deductions through investments in the oil and gas industry.  
While the phrase “oil and gas exploration” suggests actively searching for new resources, the current reality is that much of non-conventional drilling and completion is better characterized as “development” rather than true exploration. Uneducated or misinformed investors seeking tax benefits and passive income might overlook the fact that drilling and producing horizontal wells today involves significantly less risk than in the past, as oil and gas companies focus on developing low-risk reserves and wells with predictable, long-term income cycles. 
When considering working interest investments in the oil and gas sector, it’s advisable to focus on companies that strike a balance in their portfolios, emphasizing both crude oil and natural gas. These companies often target areas with high recovery rates per drilled well, ensuring a high probability of success for commercial wells. For investors, the key focus should be on return-on-investment percentages.  
Working interest owners, who shoulder the risks and reap tax benefits, are actively managing their capital to grow their asset base and maximize tax write-offs. 


Alternatively, oil and gas investors who purchase and then become mineral rights owners are content to have zero expenses with virtually zero deductions and are more than willing and happy to be on the receiving end of monthly royalty income.  
Mineral owners enjoy a passive income stream in the form of monthly checks and get a free ride for all exploration and production activity on the land where they own subsurface rights. These oil and gas royalties provide monthly income, are not exposed to capital calls, and generally hold zero holding costs.   
In terms of risk, mineral rights investing is the opposite of working interest investments. In both cases, however, ownership is based on lease positions through royalty percentages or net revenue interest via working interest participation. 


Working interest investments can be a way for investors to gain exposure to the oil and gas sector. There are many differences in the types of oil and gas investments available to investors, as well as significant differences in the benefits that those types of investments offer. And while the differences may seem obvious, can investments in working interest and mineral rights be major economic winners? It is up to each individual investor to decide what is right for their personal investment strategy as they seek to build an alternative asset portfolio. Are tax deductions the primary focus? Are they looking for participation with a fixed capital commitment? Is their goal to own a major percentage of wells drilled or a smaller percentage without capital calls or operating expense exposure?   
After a thorough assessment of risks and benefits as well as focused due diligence, some investors may decide against directly participating in oil and gas working interest. Instead, they might prefer to invest in publicly traded oil and gas companies engaged in exploration and production or mineral companies emphasizing royalty income. 
Oil and gas working interest is a great asset class as well as a great investment full of benefits and opportunity for the right investor who is not opposed to taking on risk. Deciding whether to participate in such an investment simply requires each individual investor seeking to add working interest to their portfolio to consider their needs in terms of returns, desired tax advantages, and achieving their goals for building and protecting their wealth in order to receive long term income.  


It’s important to note that any investment carries a certain amount of risk, and working interest and minerals are no exception. As with any investment, it’s important to carefully consider the potential risks and rewards before deciding. It may also be helpful to seek the advice of a financial professional before making an investment in mineral rights or mineral royalties. 
Experts in oil and gas investments are experts for a reason. Eckard Enterprises is here to help you thoroughly understand whether an oil and gas investment is right for you. We work with investors daily to ensure they are receiving the maximum benefits from their alternative investments and tangible assets.  
If you are considering an investment in oil and gas, contact us today to see how we can help you build and protect your wealth for generations to come. 

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