Intangible Drilling Costs

Forum|Forum|3 years ago
October 13, 2022
3 replies
12 views

I am an investor in an oil & gas partnership. I do not materially participate. Is there any limitation on how much of the intangible drilling costs I can deduct in year 1? I am under the impression that I have the choice of deducting 100% of the IDC's in year one or amortizing it over five years. However, does one need to materially participate in the venture in order to take a 100% deduction in year one?

Best answer by Mike9241

material participation is not required. this is the reason some taxpayers may elect to amortize

Intangible drilling cost (IDC) is either capitalized and amortized or written off as an expense in the current year. If written off, there is a possibility that a portion of the entire excess IDC amount is included as a tax preference item subject to the alternative minimum tax. If capitalized and amortized, there is no tax preference on IDC.

Anonymous_

Level 15

@Mike9241

Mike9241

Answer

Level 15

material participation is not required. this is the reason some taxpayers may elect to amortize

Mike9241

atrabul

Level 2

How do you make the election expense Intangible Drilling Cost or Amortize in Turbo Tax?

MAC18Author

Level 5

I don't think you make an actual election. Rather, you simply entire the entire amount of the intangible drilling costs reported to you or you enter 1/0th that amount if you decide to amortize over 10 years. If you deduct 100% in year 1, it is treated as a preference item so you want to make sure that does not cause you an AMT issue.

Chris-was-here

Level 2

You don’t need to materially participate to take the 100% IDC deduction in year one - the election to expense vs. amortize is available either way. The difference is how the loss is treated: if you’re not a material participant, the IDC deduction is considered a passive loss, so it can only offset passive income (or carry forward until you have passive income or dispose of the investment). If you are a GP or otherwise materially participate, it can offset active/W2 income, which is where the real power is for high earners.

So yes, the deduction is there no matter what—but whether it lowers your tax bill today or just builds a carryforward depends on your role in the partnership. That’s why choosing the right structure and operator is key. Platforms like Fieldvest help high earners by matching them with vetted operators and projects structured to maximize the deduction in a way that actually works in practice.