RoboTax
Tax. Strategy. Intelligence. Year-End Strategy
Oil & Gas Drilling Fund — IRC §263(c)

Turn $100K Investment Into $92K Tax Deduction

Intangible Drilling Costs (IDCs) create immediate ordinary income deductions—not passive losses. One of the few strategies that directly offsets W-2 income in Year 1.

~92%
Year 1 Deduction
Ordinary
Income Offset
Not AMT
Preference Item
15%+
Depletion Ongoing

How Drilling Costs Break Down

WELL COSTS
Intangible Drilling Costs
Labor, fuel, supplies, fracking
~70%
Tangible Equipment
Rigs, casing, machinery
~30%
§263(c)
IDC Deduction
§469(c)(3)
Non-Passive
§613A
Depletion

Tax Savings Waterfall — $100K Investment

$37K
Federal Tax
Before
-$34K
IDC
Deduction
-$5K
State Tax
Savings
-$3.5K
NIIT
Offset
= Net
Effective
Cost
Net Investment After Tax Benefits: ~$57,500 (42.5% immediate return)

Why This Works — And Why Most CPAs Miss It

1
Invest in
Drilling Fund
→
2
GP Status =
Non-Passive
→
3
IDCs Deducted
Year 1
→
4
Offsets W-2
& Active Income
→
5
Ongoing Income
+ Depletion
✓ Ordinary Income Offset: Directly reduces W-2, bonus, or business income (not limited to passive)
✓ Not AMT Preference: 1992 Energy Bill exempts independent producers from AMT add-back
✓ 15% Depletion: Ongoing tax-free portion of distributions for life of wells
✓ QBI Eligible: Distributions may qualify for 20% pass-through deduction under §199A

📊 Illustrative Scenario — High-Income Professional

Modeled Impact

Client Profile

Physician, $1.2M W-2 income
37% federal bracket + 3.8% NIIT
High state tax (CA, NY, NJ)
Needs ordinary income offset
$200K drilling fund investment
$444K
Tax Before
$359K
Tax After
$85K
Year 1 Savings
57.5%
Net Cost Reduction

Illustrative scenario based on 2024 tax rates. Actual results vary by individual circumstances, state, and fund structure. Not tax advice.

Ideal For:

High W-2 earners ($500K+) Large bonus year Business sale / exit event Roth conversion offset QBI phase-out recovery Stock option exercise NUA distribution year Real estate professionals with passive income