December 1, 2018

The In And Outs Of Tax Deductions For Oil And Gas

SMR 2 | Tax Deductions

 

If there was a way for you to get a deduction, would you be interested in that? As we approach the end of the year, people are looking for ways to decrease their tax liability, looking for ways to decrease the money they owe Uncle Sam. There are ways to do that. One of the ways is oil and gas. Another way you get tax deduction is to invest your cash in direct participation. If you’re looking for a more consistent way to get a return on your money, you can invest in the land. There is value in minerals on hydrocarbons below the Earth’s surface. Discover some ways you can take advantage of the current tax code and decrease your tax liability.

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The In And Outs Of Tax Deductions For Oil And Gas

The good thing that we’re talking about as we approach the end of the year is tax deductions for next year. I’m going to have a great show next episode. I’m going to have my good friend and colleague, Jordan. We’re going to talk about the in and outs of tax deductions for oil and gas, but there is still time to invest in oil and gas and you get a deduction for 2018. You probably will have to file an extension. That’s what I do every year. I have to file an extension because we don’t get our K-1 until late September. To me, it’s not a big deal because we’re trying to get every penny. I’m an absolute control freak with my money. I want the company to get every copper cent of a deduction for me that I can pay less at the IRS and it has been very beneficial for me and other people. Once you do the research and once you learn about oil and gas tax deductions, there’s nothing else out there like it.

Investing In Oil And Gas

As far as the deduction in income and potential making money, there’s nothing else out there like it. I encourage you to get educated and to join in the next episode as I have Jordan on the show talking about the great benefits of investing in oil and gas. Just because you have never heard about the tax benefits of oil and gas, it doesn’t mean it’s not real, it doesn’t mean it’s not true. It’s maybe new to you. There are some great benefits and he and I will discuss them, so I encourage you to tune in. When most people think about oil and gas, they think of Baton Rouge ExxonMobil because we’re right here and you probably know somebody, have a family relative or live by someone who works at ExxonMobil. I have several ExxonMobil retirees, workers that I have called in the show and several have become clients. That is the usual mentality when we think of oil and gas.

When I think of oil and gas, I do think of ExxonMobil. We had a very good friend of ours in Port Allen, Mr. Larry Woods. He still works for ExxonMobil. I don’t think he’s ever going to retire. My next-door neighbor growing up in Port Allen, Mr. Gerard Alleyne, probably is still working for them. He works eighteen hours a day, seven days a week. He was always working. You probably know someone or have a relative that works there. There are some things going on right now, a little bit North of Baton Rouge in East and West Feliciana. Some major oil companies are doing some drilling. We have ConocoPhillips, Marathon and EOG are all drilling. They have all leased land in the square. If you look at a map and you look at Wilkinson and the mid counties in Mississippi and then East and West Feliciana, even in Pointe Coupee Parish and St. Helena.

St. Helena is where my roots are in beautiful downtown Greensburg, Louisiana. There’s a lot of leasing going on. They are drilling some wells right now and there are a lot of eyes looking at that. They’re targeting the Austin Chalk formation. One of the things that I’m interested in investing in the oil and gas is the way that our company leased the land. The Day family have 400 acres up there in Ethel. It’s a couple miles behind where the old F.S. Williams Country Store is. It burnt down but my grandfather bought some property there in the ‘60s. He passed it down to his kids and my dad was the first one to pass away to the four kids. I and my sister had my dad share and do a little hunting and fishing up there. We leased our land in 2011 to Devon Energy. Where did Devon get the money to pay us and the numerous other landowners in the area the cash for the leases? Where did they get the money to do that? With their public traded company. They get some of their money. They make revenue on their projects as well but they also raised money from shareholders and stockholders.

SMR 2 | Tax Deductions

Tax Deductions: Investing in oil and gas wells is patient money, but the government, the IRS, will reward you for being patient and gives you some mammoth tax deductions.

 

We’re not a public traded company. The company I work for is a private company. They raise their money from lenders and you have an opportunity to lend them money and in turn, they’re going to pay you a decent rate of return. It’s not a home run, but it’s a decent amount of interest for the amount of risk involved. There’s risk involved in everything but in this, the risk is very mitigated, very low. They’re going to pay you if you lend them your money for one year, two years, or three years, and it can be cash or it can be IRA money. If you have money sitting in an old 401(k), you can transfer that to a self-directed IRA and there’s no penalties or taxes to do that. You just transfer it over. You got to pay a fee to the new custodian and they usually charge $50 one-time fee for opening the account and $250 a year. If you put in $50,000, which is the minimum or $250,000, they charge $250 a year. You’re going to pay less right there than what you’re paying your financial guy his fee for managing your money.

A Solid Double

It could be a great place for a portion of your money. It has a consistent rate of return. For example, if you loan them your money for one year on this simple interest, let’s say a $100,000, they’re going to pay you $8,000 and this is going to be paid over twelve months. You get monthly income if you want to loan them your money and receive no monthly income and they compound it, they’re going to pay you back $8,299. You make roughly $300 more by not receiving the monthly income and treating it like a CD where you get your basis and your interest back at the end of the year. $8,000 for one year, not a home run but it’s not bad. It is not correlated to Wall Street. It does not matter if Wall Street goes up and down, you will get paid your money. It is not tied to the prices of oil and gas per barrel. It is not tied to the ups and downs of Wall Street. If you want to lend your money for two years for simple interest, they’re going to pay you $17,000 over the course of 24 months. Do the math on that.

If you want to loan them your $100,000 for three years, they’re going to pay you $27,000. Then divide that by 36 months to get your monthly amount. The monthly amount for the compounding for the two years is $18,459. About $1,500 more over the two-year period versus simple and compounding. If you loan them $100,000 for the three-year simple interest, they’re going to pay you $27,000, divide that by 36. That’s your monthly payout. The compounding is going to give you $30,864 back at the end of the three-year term. Give $100,000, get back almost $131,000 at the end of the three years. Is that a home run? No, but I call that a solid double. We’re talking baseball terminology here. I don’t swing for the fence anymore. I’ll take the four for four with two doubles and two singles all day. Then going over for swinging for the fence every time.

Basic comes down to a one-year investment of simple interest at 8%. The one-year compounding investment is 8.3%. The simple interest yield on two years is 8.5%. The two-year compounding yield is 9.23%. The three-year simple interest yield is 9%. The three-year compounding yield is 10.28%. The compounding is interesting to me because it’s a boring investment. There is nothing to look at every month. You get your money back on the simple interest, the compounding is like a CD, one, two, or three years and you lock it away. Investing in the oil and gas wells, there are some tax deductions but the income fluctuates. Number one, are they going to hit oil and gas? Number two, the price of oil per barrel. Number three, how many barrels of oil per day? That is patient money but the government, the IRS will reward you for being patient and giving you some mammoth tax deductions. There are some great benefits of investing in oil and gas. There’s something called IDC and we’re going to talk about that some.

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Intangible Drilling Cost

IDCs are anything that you can’t recover. They’re anything that’s intangible. That’s what it stands for. IDC is intangible drilling cost. Piping, cement, lubrication and that stuff that you labor, fuel site preparation, road construction, all that stuff. Wages, supplies, drilling mud, cementing, logging, crop damage, all that stuff is under the intangible drilling cost. The current IRS tax code states that you can write off up to 85%. You can get a deduction for up to 85% of IDCs. That’s why it takes so long to get your K-1 form back for the investment. If you’re still looking for a tax deduction for 2018, whenever you file your 2018 taxes in 2019, you can make an investment in the oil and gas up until December 31st and get a write-off, get a bottom line deduction for almost up to 85%. Let’s say give or take a little bit on 80% because I’ve seen them come back in the high 70s. The law allows the maximum of 85%, but it’s usually around 80% or close to 85% as possible. They will get you that in September of 2019 to use for your 2018 taxes.

I’m not a CPA but you’re going to have to file an extension to do your taxes if you invest in oil and gas. I do that every year, it’s not a big deal. I am still amazed at how many people don’t know about this. More than that, I’m still amazed at how many CPAs question it and still don’t know about it. CPAs mostly look in their rear-view mirror. They’re not looking ahead. That’s not all CPAs, I do know somewhat out of the box CPAs. The CPA’s job is to file the tax return. They’re not necessarily looking to get you to do the deductions. Some do help out with that and remind you of this and that, but they file the return. I’m amazed at how many CPAs call me, “Hollis, Joe told me to call you and he’s looking at putting $100,000 in oil and gas well. Are you telling me that he may get a deduction for up to $80,000?” “Yes sir, maybe more than that.” “How does that work?” I usually introduce them to somebody else at the company who can talk all the CPA language.

If you’re looking for consistent income, maybe becoming a lender to the company to help purchase some of the lands there, is a way for you to get consistent income. 8% for one year, 8.5% for two years, 9% for three years, simple interest. There are risks, absolutely. There’s risk involved. The risk is very mitigated. It’s my opinion. You can check it out for yourself to see if there’s something that is a good fit for you. Maybe talk to some current investors around that’s been doing this for a while. You’re loaning the company your money and they are in turn paying you an interest rate. It used to be a little bit higher than this but business has gotten better and it’s easier for them to get money so they lowered the interest. The interest used to be quarterly and now it’s monthly. It’s another alternative way to get in the industry of being an oil and gas investor. There are several ways to invest in oil and gas.

This is one and there are hundreds of different companies out there like these small companies who do what we do. We do it very efficiently and we’re a small company, so we can control cost. We do it well, we have a pretty good track record. Somebody will do both. If you sold a business this year or you received an inheritance or maybe you cut some timber on some property or you received money for some leases. If you’re a resident or have land in East and West Feliciana, you’re looking possibly for a tax deduction. Anytime I can give Uncle Sam less money because Uncle Sam is bad sometimes, I’m happy. The current administration made this even sweeter. You heard me go over IDC, intangible drilling cost. I’m going back and forth between the wells and the land. Let me be clear, the land, you get no tax deduction. There’s no tax deduction with that. The wells are where the deduction is. With the current administration, there’s something called the alternative minimum tax liability. It’s where you can write off, you can accelerate that cost in the first year.

SMR 2 | Tax Deductions

Tax Deductions: Uncle Sam gives a nice tax deduction for putting your money with a company that is drilling oil wells or that is trying to recover more oil in wells that have been drilled years ago.

 

Educate Yourself

There’s potential here to write off. There’s a potential to get a deduction for the amount. I’ve been saying it’s up to 85%. There’s potential to get up to 100%, depending on when the wells are drilled and all that. It’s potential because of what the Trump administration did of only accelerating the TDCs. Also to the first 15% of oil well activity. Until the life of the well, what we say into perpetuity. The first 15% of income for oil and gas wells, the actual producing of grabbing the oil out of the ground is tax-free. The first 15% every year is tax-free. The taxes for the oil and gas land income, that’s going to be taxed as ordinary income. There are people that do both. People want the consistent monthly income in oil and gas and people want the deduction in the wells. I encourage you to do your own education. There’s a website that we send people to and you see if it’s a good fit for you. It’s for accredited investors only and if it’s a good fit, get educated. Just because you never heard about it from your strip mall financial advisor or from your financial planner, even the certified ones, it doesn’t mean it’s bad. Most of those guys only have access to stocks and to mutual funds that maybe hold oil and gas companies. They don’t have access to the direct participation companies and that’s who I work for. I’m a salaried employee for them. Whether someone invests $50,000 or $500,000, it doesn’t matter. I get paid the same amount. I don’t get paid any kind of fee or anything like that or commission off your investment.

I’m a salaried employee and I help raise capital for them. I’m located down here in Baton Rouge. They are in Texas. As you know, you can work for companies and not be located in the same state and I do a very good job. They go after the low-hanging fruit of oil and gas. Going back to the land, the 8% for one year, 8.5% for two years or 9% for three-year simple interest. That’s not a home run but it’s a solid, stable, consistent return with the solid, simple interest payment for you. You’re acting like the bank, you’re lending the company your money. They’re taking it, using it to go to lease the land, to pay some of the landowners and then in turn, paying you back some interest for doing that. I encourage you to go look at it and get educated on the oil and gas website as well. You will get sent an email link to that with a username, password, all that. It’s good for seven days. Intangible drilling costs, tangible drilling cost, alternative minimum tax liability, depreciation of equipment cost, the depletion allowance. Get educated.

Let’s talk about oil and gas. Let’s talk about some tax deductions. As December approaches us and the end of the year approaches us, if you’re a business owner or a high-income earner or anybody, it doesn’t matter, people are looking for ways to pay less taxes to good old Uncle Sam or bad Uncle Sam. I’m affiliated with a company out of Texas. They drill shallow wells. They go through secondary recovery into oil and gas and there are major tax deductions, tax advantages for investing in oil and gas. If you’re looking for a deduction for 2018 that you will use in 2019 when you file your 2018 taxes, this is a possibility. You have to get educated and see if it’s a good fit for you, but there’s something called intangible drilling cost. The current law says that you can deduct up to 85% of your current investment, your current amount that you put in, but it may or may not be 85%. It depends on the company and the project. I have seen it as high as 85%, but I’ve seen it as low as 78%. What we’re talking about is bottom line deduction. We’re talking about a way to throw you into a lower tax bracket if you decide to do it.

Trump Tax Advantages

This is what’s amazing too is the first 15% of income is tax-free as well forever. We have our long-year and now this company like to get in and out of the projects in about three to five years. That’s our exit strategy. Get in, drill the well, get the tax deduction, get some monthly income, prove the reserves and then sell it. Then get out and then repeat. It’s like flipping oil wells, instead of flipping houses. It’s about three to five-year commitment and Uncle Sam gives you the benefit. He gives you a nice tax deduction for putting your money with a company who is drilling oil wells or who is trying to recover more oil in wells that have been drilled years ago. The Trump administration made it better. He did it where you could accelerate some other costs in the first year. There is a way potentially to get 100% deduction for the amount you invest in. It’s amazing, there’s nothing else out there like this as far as the deduction goes. I know there are a bunch of different deductions, it used to be big at one time in Baton Rouge was the movie tax credits and some solar panels, and some conservation easements and all that. I have somewhat looked at all that stuff and there’s still nothing else out there that compares in my opinion to the oil and gas deductions and I am no CPA.

Learn what else is out there besides what Wall Street wants you to know about. Click To Tweet

I was born and raised in West Baton Rouge Parish. That’s going to help for a little bit of something, don’t hold that against me. When you look at the tax advantages for oil and gas and you look at the way the IRS and the way the federal government encourages drilling, these tax laws are put into existence in the ‘80s to encourage American independence from foreign oil. America is rock and rolling. When you look at most of our wells in the Permian Basin, at North Dakota, there are some things going on right here in Pointe Coupee Parish, East and West Feliciana, the Austin Chalk formation, ConocoPhillips and Marathon and EOG, they’re all over there talking the Austin Chalk formation. There are ways that these companies have found and there are still risks. Anytime you put a drill bit in the ground to 4,000 feet deep, like we do 5,000 feet deep, there’s a risk but the risk has been mitigated.

The IRS rewards you with a tax deduction for that risk. If there was a way for you to get a deduction, would you be interested in that? Just because you never heard about it, it doesn’t mean it’s bad. I’m still perplexed at the CPAs that I talked to that have never and I usually hand them off, I’ll do a little bit of educating them. I hand them off to somebody in the company who knows the tax code way better than I do. It’s an education process but a lot of CPAs don’t know about this. It doesn’t make it bad because I’ve met people and go, “Hollis, why haven’t I heard about this? Why has no one told me about this before?” I don’t know why they haven’t told you about it before but it doesn’t mean that it’s not real. Look at the tax code. I have been very fortunate and very blessed to be around some people that are way smarter than me, that has shown me what they’re doing with their own money and I have just followed in their footsteps.

There are potential ways to invest your money and the law says 85% deduction. The Trump administration has accelerated some other allowances where you could potentially get up to 100% and then the first 15% of income every year is tax-free. I encourage you, if you were looking for a deduction for 2018 that you will use when you file your 2018 taxes in 2019, this is a possibility. I encourage you to listen to next week’s show as well. You’ve got to have my good friend and colleague on the phone, Jordan, who I’m going to interview and let him educate you on the advantages for oil and gas, tax advantages, on ways to make money, for your money to make money. One of the main reasons that most folks have never heard about this before is because the way the system is set up right now for financial advisors. Those guys are going to introduce you to things that Wall Street is out there and this company here is not a public traded company. We’re a small private company. We’re not on Wall Street and those guys get paid a fee to manage your money. I get paid a salary so I don’t get anything. The minimum investment is $50,000. Whether you invest $50,000 or $1 million, I make the same thing. I’m a salaried employee. I just happen to be located here in the Red Stick, here in Baton Rouge.

As we approach the end of the year, people right now are looking for ways to decrease their tax liability, looking for ways to decrease the money they owe bad Uncle Sam. There are ways to do that. One of the ways is oil and gas. Another way you get the tax advantage, the tax deduction is to invest your cash in direct participation. If you’re looking for a more consistent way to get a return on your money, you can invest in the land. There is value in minerals on hydrocarbons below the Earth’s surface. Just like we have talked to ConocoPhillips for our land in East Louisiana Parish. If we would have leased our land to ConocoPhillips, how were they going to pay the Day family for our lease? They are a public traded company. This is a way to lend, because you’re basically a lender. You’re the bank for this company and they, in turn, are going to pay you an 8% rate of return for one year, 8.5% for two years or 9% for three years simple interest. Not a home run, but not bad. The compounding yield is 8.3% for one year and 9.23% for two years and 10.28% for three years. Not a home run, but solid. How was that a risk? The risk is that if the company goes bankrupt, we’re going to end up as creditors and sue them. That’s the risk. It’s not guaranteed.

SMR 2 | Tax Deductions

Tax Deductions: Anything in the oil and gas is not guaranteed. It’s backed as long as the company is in operation, but it’s not guaranteed.

 

Perfected Liens

I get calls from people, “Is that guaranteed?” No, it’s not. It’s not guaranteed. I have a strategy that protects some of your wealth off the radar screen of the IRS. That is guaranteed, but that’s another conversation. Anything in the oil and gas is not guaranteed. It’s backed, it’s guaranteed as long as the company is in operation, but it’s not guaranteed. I think the risk is very mitigated. It’s an established company. The way each business loan is secured by pari passu security interest in the project loan documents perfected via a UCC financing statement in favor of each lender. Perfected liens are created when the lender files a UCC financing statement with the appropriate authority, which would be the Texas Secretary of State. This statement specifies the collateral use to secure the loan and gives the lender precedents in the collection process if the borrower defaults. Unperfected liens have lenders open to possible claims against the collateral by other creditors. That project alone will be secured by liens against the real and personal property of the sponsor. It does you right there. It’s not guaranteed but the risk is well-mitigated and brings it down low, in my opinion. That’s what this company does. They do a great job of going after the low-hanging fruit of oil and gas. As the end of the year approaches, people are looking for different ways to invest, different strategies, looking for tax deductions. There’s a possibility. I encourage you to do some diligent research and ask them questions and see if this is right. If you’re an accredited investor, this could be something for you to take a serious look. If you owe Uncle Sam money and you’re looking for a way to legally decrease what you owe him.

We’re talking about a way to have seen this, put people in a lower tax bracket or two depending on how much you put in. If you are open minded, I encourage you to check this out. Right now, it could be a good time to look at oil and gas as a strategy. There are some great benefits to that and all we’re doing is taking advantage of the current tax code. Taking advantage of what is currently on the books that Ronald Reagan set into law. He passed it when he was president trying to encourage the independence of our country from foreign oil. Those laws are still in the books and we went through major tax reform last year and they’re still in the books. In fact, they made it even sweeter, “Hollis, how can you make it sweeter?” They made it where you could accelerate some other cost, where you could potentially get a 100% deduction from what you invest. It may or may not happen, but it could be 100% deduction depending on when you put your money in and depending on when the wells are drilled.

I can promise you the companies will do everything they can to get you to your deduction as quickly as possible. If you do this, more than likely you will be filing an extension on your taxes because you and I do not get the K-1 form until late September or so, to bring your CPA to file. They wait as long as they can because they’re still trying to capture all those costs, all those IDC, intangible drilling cost. I’m going to have to show up on podcast pretty soon. I’m working with some iHeart people here and also on my website, redesigning my website to keep the shows up on the podcast. It’s about learning what else is out there besides what Wall Street wants you to know about.

I do everything differently. I like to say I swim upstream than what most conventional financial guys do. That don’t make them bad, don’t make me bad. I just do differently. When I had a 401(k), I lost money and it wasn’t because of me. It was because of the market and I just chose not to go down that road anymore. Whenever you are in oil and gas as an investor in the projects, as far as a direct participation, oil and gas well investor. Number one, are you going to hit oil? Number two, the price of oil per barrel. Number three, how many barrels of production per day? The price of oil per barrel fluctuates daily, but on the land side, it’s a consistent income. It’s a good monthly income, revenue day is the 25th of every month and it’s a good consistent income. It could be a small portion of what you have as a strategy for something consistent.

As far as investing your cash in oil wells, there are risks. Number one, are they going to hit well? Number two, how many barrels of oil per day? Number three, the price of oil per barrel. Just look and see if this is for you. There are hundreds of different companies who do this. There are many other companies besides ExxonMobil, Chevron, and Shell, we know those are the big guys. There are a ton of small guys and you have to see that you find the right one to see if it’s a good fit for you. Call me 202-SAGE, that’s 202-7243. The website is SageMoneyRadio.com. If there was a way to lower the amount you owe to Uncle Sam, would you be interested? Get educated, visit the website. I hope you enjoyed the show. God bless you. God bless the USA.

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