MPG Petroleum, Inc.
The following general discussion is provided for background information only. Potential investors should consult with their own advisors.
CONGRESSIONAL INCENTIVES: Oil and gas development from domestic reserves help to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, congress has provided tax incentives to stimulate domestic production financed by private investment sources. These tax benefits enhance the economics of an oil or gas investment. With the passage of the Tax Reform Act of 1986, oil and gas ventures are now one of the most tax advantaged investments. The Act specifically exempts oil and gas working interests from being classified as “Passive Income”. (See Section 469 (c) (3) of the Tax Code.)
INTANGIBLE DRILLING COST TAX DEDUCTION: Intangible drilling and development costs (IDC) are 100% deductible in the year that they are incurred or paid. These are expenditures for items that have no salvage value, and are “incidental to and necessary for the drilling and the preparation of wells for the production of oil and gas”. They include such costs as wages, rental equipment, surveying, building roads, preparation of well location, transporting the rig and equipment to the drill site, drilling, consumable supplies such as water, fuel, mud, drill bits, cementing, logging, coring, drill stem testing, installation and perforation of casing (but not the casing itself), fracturing, acidizing, swabbing and installation of production equipment (through the christmas tree). Intangible drilling costs usually average between 60% to 85% of the capital invested in a drilling venture. (See Section 263 of the Code.)
DEPRECIATION OF TANGIBLE EQUIPMENT: Equipment costs are amortizable expenditures for tangible assets that have a future useful life and have a salvage value. Well equipment costs include such items as casing, tubing, rods, various equipment placed in the borehole in connection with running and cementing casing, pumping equipment, flow lines, separators, treating equipment, tank batteries, and salt water disposal equipment. As with equipment costs in any other business or industry, lease and well equipment costs can be depreciated and deducted from gross income through annual depreciation. Most equipment will be depreciated over a five to seven year period.
SMALL PRODUCERS TAX EXEMPTION: This benefit is also known as the “Small Producers Exemption”, since it is not allowed to those individuals owning production of more than 1,000 barrels of oil or 6,000 MCF of gas per day. Mineral deposits under a leased property are natural resources referred to as a “wasting” capital asset, and the exhaustion of these resources through extraction is called physical depletion. The reduction in the value of the reserves through production is economic depletion. Through the depletion allowance, a minimum of 15% of the gross income from the sale of oil and gas is tax free. Higher tax free allowables may be available depending on each individual’s particular tax situation. (See Section 513A of The Code.)
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