Oil & Gas Investing > Tax Benefits Frequently Asked Questions (FAQ)

1) How can I receive these tax benefits?

If you invest in an actual oil and gas drilling or development project, the benefits are there for you to utilize based on your investment amount. Ultimately, with current year IDC write-offs, depletion allowances, and accelerated depreciation on tangible goods utilized; your entire investment is written off against active income over a few years. The best part is that you get these benefits while your well(s) are producing you a cash flow income and more tax benefits.

2) This sounds almost too good to be true; are these legitimate tax benefits?

Absolutely legitimate!! We provide free reports with copies of the actual tax code, if you will but ask. These tax provisions have been slightly modified over the years but have been in place for decades and are a commonly accepted part of every business involved in oil and gas. Many accountants from states with little or no oil and gas production are often unfamiliar with these provisions and occasionally they avoid these aspects on their clients' tax returns. But, along with a good production income, the tax benefits are a significant step in the wealth building process that should not be overlooked.

3) When investing in oil and gas, how much of my investment can be used to reduce my current income tax liability?

If the project you invest in is an exploration or development type drilling venture, one could elect to expense from 60% to 80% of the total investment as intangible drilling and development costs (IDC), thus directly reducing the taxpayer's adjusted gross taxable income for the tax year in which the investment is made.

Lease and well expense (tangible drilling costs) could involve perhaps 20% to 35% of the total amount invested and is typically depreciated over seven (7) years on an accelerated basis, with almost 20% of the total depreciation amount taken in year one.

The balance of the investment amount would likely be attributable to the costs of the underlying leasehold and this cost is recovering through either cost or percentage depletion allowance. Both methods are calculated each year and the IRS allows the taxpayer to utilize the method most favorable to the investor's tax return.

4) Is there a chance that I could be audited for this investment?

It is logical to assume that anyone making investments in a program that reduces taxable income reported to the IRS raises their probability of being audited. It follows that the income level and the tax brackets of individuals who qualify to invest in gas and oil also subject these investors to some level of scrutiny by the IRS. The tax information SPXCO uses to compile annual joint interest statements or partnership returns is derived from actual invoices and supporting documentation received from vendors to the joint venture and its operations. Further, SPXCO relies on certified public accountants and other tax professionals to oversee and prepare such statements. This affords the CPA, the company and/or the investor the advantage of a well supported position upon any review or audit. SPXCO has never had a project audited since the company's inception, nor has any joint venture been audited or questioned in which our management has ever had a part in even prior to SPXCO's formation.

5) What about tax benefits after production is established?

Essentially, owning oil and gas production is a lot like being involved in just another business. Accordingly, the expenses related to operating and producing wells qualify as an active write-off as ordinary business expense. Additional IDC write-offs and tangible goods depreciation can be created in the life of the project as the well is worked over, re-completed and/or eventually plugged and abandoned after it is depleted below its economic limit.

5) How do I file or what form do I file to receive my tax benefits?

Your tax benefits are part of the statutory tax code. You receive them by including your oil and gas investment activity on your annual tax return. Most investors just provide the information to their tax professional for filing.

As regards the proper forms to file, this depends upon which type of entity the investment is made under. There are different forms to use if the investment was from a corporation, a partnership, a trust, or as an individual. As always, we recommend that you retain the services of a certified public accountant who has experience in dealing with oil and gas investments.

There is nothing difficult about proper tax filing, its just that many CPA's are not familiar with the tax code as it relates to energy investments. As you might imagine, CPA's from the known “oil” states like Texas , Oklahoma , New Mexico , Louisiana , and Kansas typically have more experience with this part of the tax code.

6) What tax benefits are available to foreign investors in U.S. oil and gas properties?

Tax benefits are favorable to foreign investors who have U.S. income, but we are not familiar with any foreign tax effects. Any benefits will be delineated within the appropriate section of the statutory tax code. Foreign investors are advised to consult a professional tax advisor who has experience with oil and gas investments as they relate to foreign investors.

7) What documents are required from Joint Venture or the operator for me to file for my tax return?

For the year in which you make your investment, you will receive a statement indicating your total investment amount and how much is attributable to IDC, Lease and Well Equipment and Leasehold Expense, which are the major tax write-off categories. This will provide your tax accountant adequate information regarding your investment write-offs.

After the well(s) are drilled, completed and producing, you will receive monthly accounting which you should keep for your accountant as well. Basically, all the information you need to take to your tax accountant is included on the monthly statements, JIB's (joint interest billings) and check stubs that you receive each month over the calendar year; however, after the close of the business year SPXCO also sends a year end summary out to each investor which duplicates and summarizes the individual monthly accounting.

8) On what time schedule will I receive information for income tax reporting?

You will typically receive your monthly revenue check, operating statement, and JIB's (joint interest billings for lease operating costs) at the end of the month, 60 days from the close of a production month. A set of twelve check stubs, operating statements, and JIB's received in a calendar year are sufficient for your CPA to file that part of your tax returns concerning your oil and gas properties.

SPXCO typically sends a year end income and expense summary by the end of February for the previous calendar year. This information will also be sufficient (alone) for tax purposes.

IRS 1099 Forms are sent out by the end of January each year for those investors receiving over the minimum required reporting limit which is $600.00 in 2006.

9) What if I lose my tax information?

Our accounting system is “state of the art” and we can reproduce and replace lost information for an investor typically without difficulty or delay. However, we are careful to require proper identification and authorization to provide this information to insure it is delivered into the proper hands. Authorization to provide tax or accounting information to your personal CPA can be given by express written direction set forth in the Confidential Investor Questionnaire that you complete when your investment is made. Without proper authorization and documentation, we will not release your information to any third party.

10) Where can I get experienced help with filing for my oil and gas investment tax benefits?

SPXCO does not offer and cannot provide tax or legal advice; but if you need the services of a tax professional experienced in oil and gas matters, we can recommend one to you. Our company CPA firm is typically available to help answer a basic question or two as a service to our investors. However, if you want a full service relationship, such as the actual preparation of schedules and tax returns and/or tax consulting; then SPXCO can only introduce you to a professional and then you must establish a separate business relationship for further service.