December 22, 2018

Investing In Oil And Gas, Tax Advantages, And Deductions

SMR 10 | Oil And Gas

 

There are so many alternative ways for you to make money. As the world becomes more global and dynamic, we now have more and more opportunities to reach beyond our own walls and create more. Here, Hollis highlights how we can take advantage of the tax advantages on investing in oil and gas. He is all about the government keeping their hands of your pocket and paying less in taxes. Applying that on how you can use that as your edge, he lays down some great ways as well as examples that show the current oil and gas situation of the country. Hollis also gives the different ways to invest in oil and gas while talking about tax benefits, deductions, and annuities and breaking down myths.

Listen to the podcast here:

Investing In Oil And Gas, Tax Advantages, And Deductions

I deliver some alternative ways for your money to make money. I’m all about taxes. I’m all about the government keeping their hands out of my pocket and paying less in taxes. The two strategies I’m affiliated with, that’s what I do. I educate. I’ve been very blessed to be a part of a company out of Texas that’s been established for a while and have a good track record of drilling, trying to extract oil. As you take a look back at 2018 and your investment portfolio, where is that from when it started? For the most part, all the gains that were made in 2018, they’re done. They’ve been scratched. Even in a year, I think the S&P is even down a little bit. What I’d like to do is to show people the phenomenal strategy to add to what you’re doing. Another arrow in the quiver is looking at the strategy of oil and gas. There are different ways to invest your money in oil and gas. You can actually buy stocks. You can own shares of companies that are publicly traded. We have one of the biggest ones right here in the country, right here in Baton Rouge, ExxonMobil. You can own master limited partnerships, MLPs. There are probably some mutual funds that have some shares of some of the big oil producers in there. To do all that, you usually have to go to a traditional Wall Street guy or lady, a brokerage person.

Tax Advantages Of Investing In Oil And Gas

I worked for a company that is located in Irving, Texas. It’s a small company. We do a great job of controlling costs. I’m a salaried employee for them. We drill wells in the Permian Basin, on East Texas. We lease land. We take the lenders’ money. That’s another way to invest your money. What I’m talking about is the magnificent and awesome tax benefits, the tax advantages of investing in oil and gas. As far as the tax codes, I’m referencing IRS Section 263(c) 59(e). That’s talking about the intangible drilling costs of oil and gas. I’m still shocked that so many people don’t know about this. They don’t because of the way the investment world is structured. This is getting a little bit more of my view upon the world and our awesome country. You have this entity of Wall Street, all these investment banks, you have the Fed and they want everything to go through them. That’s why your advisers who work for the big brokerage firms can’t offer what I offer because I worked directly for a company.

When you put your money directly with a company that drills for oil and gas, there are some major tax benefits. You have until December 31st to get that done. You have until December 31st to put your money there, to receive a deduction which could equal the amount that you put into. You could potentially put the $50,000 as the minimum amount. You could potentially make an investment of $50,000 and then receive a $50,000 deduction for your taxes. There’s nothing else out there that comes close to the tax benefits of investing in oil and gas. We don’t do this just for the tax benefits. We do it to make money. The tax benefits just make it sweeter.

The tax benefits of US oil and gas investments. Investment in the domestic oil and gas industry represents a significant US policy priority to encourage less dependence on foreign oil with unparalleled tax incentives offered by the US government. To illustrate this point, the tax shelters of oil and gas investment were some of the only incentives to survive the Tax Reform Act of 1986. The IRS states the importance of the petroleum industry to the economy of the United States has led Congress to pass specialized tax laws that are unique to the oil and gas industry. One of the strategies is 100% lowering of tax to write off intangible drilling costs, 100% depreciation of equipment costs, reduction in taxable income about 15%, which is the depletion allowance and almost full deduction of an investment made late in the tax year. Income derived from oil and gas investment is subject to federal taxes and in some jurisdictions state taxes. Tax law also varies depending upon whether investments are made by an individual or a business entity such as a corporation or a partnership.

There are some sweet deals going on. The current administration made it sweeter with their tax overhaul. There used to be where you could write off up to 85% amount. For number’s sake, if you put in $100,000, the maximum that you could receive write off would be $85,000. Each project, each company is a little different how they do things. You’re probably going to have to file an extension for your taxes if you start doing this. If that’s a big problem with you, then this strategy is not for you. I had to file an extension every year. I don’t pay my taxes until October of the previous year because we’re waiting to get the information back on how much we can write off. It used to be 85%. The Trump administration tweaked it a little bit better where you could actually accelerate the depletion allowance. That’s what gives you the opportunity to potentially write off or to deduct the same amount of the investment that you put in. The first 15% of income every year into an oil and gas investment is tax-free. It’s amazing. You have the price of oil per barrel is hovering around $50 a barrel. This is the risk.

There’s an absolute risk in everything that is done. Number one, are they going to hit oil? That’s the number one question. Number two, if we do, what’s the price of oil per barrel? Number three, what are the barrels of production per day? All that is what depends and what factors in on your monthly check because the goal is monthly income. We like to sell these packages. It’s like flipping a home. We like to drill, get the deduction, get some monthly income for a little while and then sell the package in three or five years. That’s the goal. Even though we just sold two but one of them was a nineteen-month investment. It was a 20% return on your basis. Once you factor in the taxes and everything, it was a little bit over 50%. It’s not bad for nineteen months even though we like to hold on them for three to five years, this was a deal that they couldn’t pass up.

It’s another way to add to what you’re doing. It’s another way to invest. You can go buy shares of any oil company you want to if they’re publicly traded company. You can go and do your own research on master limited partnerships. Very few people know about that and I have a couple of guys that I know who do well in those every year. There are some major tax deductions for putting your money in oil and gas. I encourage you to reach out to your CPA. I’m still shocked by the number of CPAs who didn’t know about this. We meet somebody they do it and then when they get their time for their intangible drilling cost or the deduction, their CPA freaks out because they’re not familiar with this. The tax code is very clear on oil and gas. It’s very simple. It’s a deduction. IDCs, Intangible Drilling Costs are certain drilling and development costs for oil and gas wells in the United States in which you hold, and operating are working interest.

SMR 10 | Oil And Gas

Oil And Gas: It’s another way to add to what you’re doing. It’s another way to invest.

 

The US tax code treats favorably those sunk costs related to oil and gas exploration, drilling and development by providing this beneficial write off of IDC related costs. The US allows oil and gas investors to freely invest in exploration, extraction, and development knowing that startup risk can be offset against any future tax liability. Specifically, to take advantage of the IDC deduction, investors must have a working interest in the oil and gas property either directly or through an entity, which does not limit the liability of the taxpayer with respect to such interest. As such, the investment is not considered passive, which is exposed to risk. As the owner of a working interest, oil and gas investors are deemed to be engaging in a trade or business wherein losses or deductions can offset other self-employment income. The types of drilling and development activities which are deductible include the cost of drilling, wages, supplies, drilling mud, cementing, logging, crop damage, survey, seismic to locate well sites, repairs fuel site preparation and road construction.

As an example, if a person invested $100,000 to drill a well, 80% which is around the average of the investment would be deductible as an IDC resulting in a reduction of $80,000. The law used to state $85,000. They tweaked it depending on the project, you could get up to 100% deduction in that project the same year. If you’re a high-income earner and the government is absolutely hammering you with basically what I call theft, I do think the government steals from us. When you sit down and look at the amount of taxes that we pay as citizens it’s absolutely absurd. In Louisiana, we passed more tax for these bridges and roads in which the traffic and infrastructure in the capital cities suck. It’s terrible but I don’t think throwing more money at a problem makes it better. The government gets plenty. The government gets way more dollars than it needs to function. A dollar bill will get you a cup of coffee, but in my opinion, the government is too big. The right-hand doesn’t know what the left hand is doing, therefore we have so much waste.

I’m a fairly young guy, 42 years old, and I’ve learned to never say never but maybe this is the exception. I will never vote for a tax increase. Until the government can prove to me that they are better at managing money, I will never vote for a tax increase ever. It’s a joke. I’m talking from a Federal state, even municipality, if they had to operate under the laws, they’re out of business. The fact that I can keep some of my own money in my pocket and still have an investment that’s going to pay me monthly. My monthly checks starting next month are going to be a little bit lower. There’s a 90-day lag period from when all is extracted to when you get paid on it. My check for December is going to be for September oil. My check for January is going to be for October oil, which is when the price started going down. It means I’m getting less. It might take a little bit longer to recoup my basis but the technology for oil and gas is tremendous. It’s improved over the last ten to fifteen years.

I’ve got into podcasting here on different things that I follow. I like listening to certain people. Sometimes my schedule doesn’t allow me to listen to when they’re live, so I’ll go back and listen to the podcast. I’m an old-school person, I’ve been accused of having an old soul, but I’ll tell you something, I can’t get into technology. I can’t get into reading a book on the Kindle. It takes a lot out of me to read things on the internet. When I’m reading a book, I still have to have that book in my hand. I’ve got to hear the page turn, I’ve got to flip the page. I like to underline, highlight, read a book, pick it up two years later and be like, “I don’t remember underlining this part but obviously at that point in time, this was important to me. I underlined it for a reason.” I’ve tried reading books electronically, but I can’t do it. I lose my patience pretty quickly with electronics when things don’t work. I need to go on the internet. I need for it to work without me having to figure out different things. I lose patience for things like that.

Timing Of Deductions

We’re talking about the timing of deductions. We have until December 31st to receive a deduction. As long as your money hits the company, by December 31st, you get a deduction for 2018, or maybe you don’t need a 2018 deduction. Maybe you don’t need a 2019. Another benefit of investing in oil and gas, if you don’t need the deduction that year, you can carry it forward up to three years. You make an investment, you have the opportunity to get a deduction for the amount you invested in the year. The first 15% of income is tax-free every year in the perpetuity of oil. As long as you have ownership in the well, the first 15% every year is tax-free. You pay no tax on that. If you don’t need a deduction this year, you carry it forward to three years. I would say that Ronald Reagan did a pretty good job of encouraging Americans to drill for oil and gas. The laws are still the same as they were years ago, except President Trump made it a little bit sweeter by accelerating the depletion allowance. Another benefit found under the IDC deduction regulation is the cushion of time between drilling and production. If the well is not productive immediately, as long as it begins productive operation by March 31st of the following year, the deductions will be allowed.

Paraphrasing the IRS, while IDCs, “Intangible Drilling Costs or ordinarily capital expenditures and recovered through depreciation or depletion, one can, however, elect to deduct Intangible Drilling Costs, IDCs as a current business expense.” Further according to IRS, an investor may deduct IDCs as a current business expense by subtracting it from your income, either the year you incurred or the year you pay it. That stuff excites me. Knowing what I know at 42 years old, if I could go back and do it over, I could go do it. I don’t want to take the four years out of my life to go back to law school. Knowing what I know now, I would no doubt be an attorney. Then I would go another year to become a tax lawyer. I find the tax code fascinating. There are ways for people to get deductions that you’re not going to hear from your main street advisers. You’re not going to hear about it from the Treasury Department or the IRS. You got to do some digging.

Everything I do with my own personal money is what I’m talking about on the show. You don’t hear me talk about annuities. Annuities are oversold because I’ve met so many people from this show who have called me who regret putting their money in an annuity. It was sold to them wrong. Annuities have a small percentage of people as far as an income, they’re oversold. There are better places to put money but there’s a safety mechanism to that, but I’ve never sold an annuity. What I talk about on the show is where I have my money. That’s what separates me from most of your traditional advisers. They’re carrying a briefcase with 42 different mutual funds and they’re going to pitch different annuities, companies, stocks, bonds all that stuff. I have a couple of strategies that I’ve found, and I’ve been very fortunate to be around some people who have shown me what they’re doing and I talk about it on the radio.

SMR 10 | Oil And Gas

Oil And Gas: Hang around people who are smarter than you.

 

It’s not brain surgery. It’s not rocket science as I try to encourage and influence my children to hang around people smarter than you, to ask questions. Swallow your pride and ask someone that is successful or whatever it is. I have learned to ask people, “My buddy, Mike, you have an amazing family. These amazing kids that are all grown, what did you do?” “Hollis, when me and my wife got married, we started praying for the spouses of our kids.” That’s what I’m doing. My kids are a tenth, ninth, eighth and sixth grade, I’m already praying for their spouses. I’ve asked people from parenting to investment, people that are smarter, “Mike, what did you do at 42 that you regretted? I don’t want to make the same mistake.” I’m always asking questions like that to the successful people. I’m telling you those successful people are looking at ways to lower deductions and looking for ways to get income tax free. Some of their wealth off the radar screen of the IRS and that’s what I do. That’s what I do with my own money and that’s what I talk about on the show.

Government And Taxes

It’s awesome to live in this country as aggravated as I get sometimes with our government and its complexity of being too large. The biggest problem with our government is it’s too big. We can’t manage everything. We have too many employees. We have too many state workers. We have too many federal workers. We have too many agencies. We have too much bureaucracy. I’m so thankful, it’s so awesome, me and my friend, David, we had lunch. We were like, “How awesome is it that we just get to walk and drive and have this great lunch in this country? There are so many good places to eat and good food.” We pretty much drive in the vehicle to anywhere in this country and feel safe for the most part. It’s awesome. It’s like being appreciative of hot water. You don’t think of hot water until the lights have been out for days and you don’t have hot water. You’re like, “It’s a cold shower.” I’m thankful that the Lord has given me the wisdom to be thankful and be grateful for everything. It points back to our current and past military. The men and women of our own forces who worked for 25, 30 years in the military and retired and would have died serving. The people who are sacrificing. We have people that will not be with our loved ones because they are overseas protecting this country and doing what’s asked of them. It’s the most unselfish act there is.

I’m always grateful and I try to be aware of how incredibly awesome this country is. All the luxuries and conveniences that we have is truly amazing. The Lord has blessed this country. I was talking to a friend of mine and his parents did some mission work in Albania. He would tell me about the way they live in there. It’s awesome to live in this country. What I don’t like is paying taxes, even though I do believe in paying my fair share of taxes. I believe in that. I believe we needed military, roads, and infrastructure. I do believe in that but as an American citizen, I believe that we are overtaxed. I believe the government is very inefficient. If your belief is that the tax rates are not high enough that you should be in a higher tax bracket and you believe the government should be bigger, don’t call me. We’re wasting time because you’re never going to convince me otherwise, I’m not going to convince you otherwise. I like doing business with people who believe what I believe. When I can show someone how to keep more of their own money in their own pocket, it’s awesome. There are some great ways to receive deductions for your taxes and investing in oil and gas.

The current tax code, I’m referencing the IRS Section 263(c) 59(e), IRS Section 611, 613, 613(c)(6) and then IRS Section 469(c)(3), look those up. I encourage you to do your own due diligent research. Look those up, this is for real. It’s amazing how when someone listens to this for the first time and we meet they’re like, “Hollis, is this real?” Yes, it’s real. It’s been going around for 30 years. You don’t hear about this from your mainstream media Wall Street traditional financial advisers. Those guys have to run everything through Wall Street. “Hollis, how do you get paid on this?” I am a salaried employee for the company I work for, whether someone puts $50,000 in or $500,000, I’m a salaried employee. I work for them in Dallas, but I’m located here in Baton Rouge. I come on the radio and educate people about the phenomenal tax deductions of oil and gas. We’re talking about the IRS Section 469(c)(3). It’s always been 85%, Trump sweetens the deal, or you can accelerate the depletion allowance. It’s possible there’s an opportunity to get a 100% deduction on the amount you invest in. You put $50,000, the deduction for $50,000 when you do your taxes. If you don’t need that deduction, you can carry forward it up to three years. The first 15% is tax-free of income every year in the perpetuity of the wells.

It’s about learning this. It’s awesome whenever I meet someone, and they want to run it by their CPA. I have a good friend of mine here in Baton Rouge, one of my best friends from high school and college. He’s a tax lawyer. I got him to look all this up for me years ago before I went to work for this company, verifying everything and it’s all true. That’s part of the tax code that we’re talking about over 30 years old. It hasn’t changed, talking about the depletion allowance. Investors owning oil and gas property in the United States are often pleasantly surprised to learn they’re eligible for an income tax deduction without having an actual expense to back it up. Essentially independent producers and royalty owners who are not refiners and retailers are permitted to apply a percentage depletion method, which excludes taxation 15% of all gross income, sales revenue from oil and gas wells.

The provision applies to small producers producing less than 1,000 barrels of oil per day or six million cubic feet of gas per day. Any company which produces or refines the less than 50,000 barrels of oil per day. The deduction is determined on a property by property basis with the rate applied to the taxpayers’ average daily production of crude oil and natural gas. Tax consequences of the sale of oil and gas interests when oil and gas interests are sold, complex recapture rules apply. These rules dictate whether to treat all or a portion of the gain as ordinary income. According to Deloitte, gains attributable to lease and good equipment is subject to depreciation recapture. Gains due to the sale of oil and gas properties must be treated as ordinary income to the extent of previously deducted IDC and depletion to the extent the depletion reduced the adjusted basis of the property sold. Percentage depletion claimed under the exemption for independent producers and royalty owners that exceed the tax basis in a property sold is not subject to recapture. As such, the type of interest being sold impacts whether or not capital gains or real property provisions are triggered.

We have some very smart people that we are involved with on the team, they do all the stuff for us. The deductions are there. They’re real, people enjoy them, and you are not going to hear about them from your traditional Wall Street planner. You’re not going to hear about them from the IRS. They’re not bragging about this because they want people to pay taxes, and this is a way to lower the tax burden that you owe Uncle Sam. Show me another investment in all sincerity out there like this where you can write off up to 100% of the amount you invest and the first 15% of income every year is tax-free. If you don’t need a deduction, you have three years to carry it forward to use it. Show me something else out there like that. I don’t know what there is. There’s risk involved. We only take accredited investors only. There’s risk involved. Number one, are we going to hit oil? Number two, the price of oil per barrel. Number three, how many barrels of oil are being pumped per day?

SMR 10 | Oil And Gas

Oil And Gas: Just because you don’t know about it, does not mean it’s bad.

 

There are things to factor in, but I can tell you this, going into the office and learning about this I still know a tiny bit about oil and gas. I don’t brag about it. The stuff that I talk about here, I’m reading some literature. I’m reading the IRS Tax Code that’s on the books for this. I’m telling real-life stories. I’ve been in two projects that we have sold. I’ve been in two projects where we put our money up. We received the deduction, received the monthly income when we hit the oil and that monthly income is not consistent. This takes patient money because the income changes every month, “Hollis, what do you mean?” The price of oil per barrel changes every nanosecond of trading. It’s a commodity and then maybe we have to shut a well down for two, three weeks for maintenance or maybe five days. It depends. On one check I may have from production 7,000 barrels of oil sold that month. The next check may be lower than that, it depends. It’s very transparent. The statements are very easy to read. They send you statements, and you actually see where the expenses even go, what they’re paying for.

I know a little bit and I’ll say that I do because I’m reading the Tax Code and then the stories that we sold. I was in two projects that we sold, one was an 18% return on the basis. That word basis is so important. I love talking about the basis of any investment. 18% on the basis on one and 20% of the basis on the other but both were over 50% with the total return when you factor in the monthly income and the tax deduction. One of them was a nineteen-month deal. It was 52.68% is what mine was and some people just varies because if someone got an investment may be a month later than me, then their money may be a little bit higher. If you’re looking for a way to get a deduction, I encourage you to get educated and that’s what I will give you access to. It’s because you don’t know about it, does not mean it’s bad. It’s very easy to look up. I’m referencing the IRS Tax Code Section 263(c) 59(e). It talks about the depletion allowance. Section 611, 613 and 613(c)(6). As far as the path of activity laws rules Section 469(c)(3). You can actually go to Google.com and type those in and see that it’s real, legit and it’s going on with a lot of people.

Oil And Gas Myth

One of the myths of the oil and gas is US oil supplies are dried up. While some wells have run dry, there is still an abundance of un-extracted oil. In November 2016, the USGS reported that the largest estimate of continuous oil they have ever assessed in the US, the oil reserve was found in a portion of Texas’ Permian Basin. It contains an estimated twenty billion barrels of oil reserves. That’s where we are. We do have some wells in East Texas like Cherokee County, around that area, but the majority of our wells are in the Permian Basin. By drilling in proximity to previously producing wells, this company seeks to increase their probability of finding extractable oil. Moreover, by utilizing new technology, this company creates the potential to extract oil from wells that were previously thought to be non-commercial viable. This reminds me of deer hunting and you want to kill a nice buck, where do you go? Bucks are hanging out where the does are. You have a good probability of killing a buck by going where the does are. If you’re looking to drill for oil, where should you go drill for oil? Where there is oil; where there are existing oil wells. That’s what we do. There’s a whole other side to the investment. There’s a whole other part that shows a consistent income. You can invest in the leasing part but there are no tax advantages. There are no tax deductions for that. The tradeoff is it’s a consistent income.

It’s a way to earn 8%, 8.5% or 9% per year depending on if you commit to one, two or three years 8% for one year, 8.5% for two, 9% for three. That’s the yearly yield but is paid monthly, no tax deductions. You’re never going to make 52% of your money when they sell a package. You’re lending the company your money, it’s great for IRA money as well, takes cash or IRA money is great for doing that. It’s a consistent rate of return whereas the oil and gas side, there’s potential for some nice returns when we sell a package. There are some major tax deductions going on. One of the other myths in investing in oil and gas is profits are only realized if oil prices are high. It’s very important to know that in the oil business market prices have always fluctuated. If structured appropriately, all companies can provide attractive risk-adjusted returns while oil prices are low.

This company we focus on controlling, drilling and production cost resulting in previous projects maintaining profitability even if all falls to $20 per barrel. Oil hovers around $50 a barrel. I was in these projects in 2014 when oil dropped to $20 a barrel. I still received a monthly income. It was just decreased as oil prices go up, the price of oil per barrel increases through your checks. If you’re in these projects and the oil prices decrease, your monthly check is going to decrease a little bit. It’s not hard to understand, the tax deduction is fantastic. A tax deduction is phenomenal. If you stay in it three to five years, that’s the goal. It’s three to five years for the company to prove their reserve, drill the wells like flipping a house, buy it, get it nice and shine and it pretty gets a monthly income, sell it, flip it. That’s what we do on these projects.

I had a good previous episode with Jordon Trice. He did a phenomenal job of explaining the tax benefits of oil and gas. You have until December 31st to make a contribution to a charity or non-profit to receive a deduction for the year. For me personally, I file an extension every year on my taxes. If that’s a problem for you, then this investment probably is not for you. We need to draw out, wait and try to capture as much of the cost as we can for the deduction. That’s when you have to rely on a company to know what they’re doing. They know what they’re doing to give you the deduction every year that we’re looking for. We don’t drill wells for the deductions. It comes along for the ride. I have some literature, you go to the website, get educated and learn about it. This information provides an overview of the significant tax benefits of oil and gas investment, which allows 100% of tax to write off Intangible Drilling Cost, 100% depreciation of equipment costs. This is something that gets overlooked but the first 15% of the income every year. Show me another investment strategy where your first 15% of the income is tax-free.

If you’re receiving monthly income and let’s say you receive $15,000 a year on your production, the first 15% is tax-free. It’s because of the depletion allowance and almost full deduction of an investment made later in the tax year. I encourage you to get educated on this topic if you are looking for a deduction. Our company, I’m a salaried employee for them. We’re at Irving, Texas. I’ve been doing this for a while. The company’s grown dramatically since I started working for them years ago. We got it down pretty good. The technology in oil and gas has increased drastically and we’re taking advantage of that. There are some great tax advantages. We drill oil wells to make money. We do the leases to make money but there are some great tax advantages that come along for the ride. I know not all of the audience are high-income earners but some are. It doesn’t matter what your income is. There are people that take out their RMDs, turn around and put it in oil and gas project to negate the tax they owe on it. Learn about ways to lower the tax burden you owe to the government. It’s perfectly legal and it’s the real deal legit. We do a lot of calls and talking with CPAs, walk them in through this. Once they understand it, they do their own research and see the tax laws are there. I’ve been referencing parts of the Tax Code Section 263(c) 59(e), Section 611, 613, 613(c)(6) and then Section 469(c)(3). Read those yourself and if you want more, give me a call at 202-SAGE, 202-7243. The website is SageMoneyRadio.com. I hope you enjoyed this show. God bless you. God bless the USA.

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