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Investing in Oil: Although there is principal risk associated with investing in oil and gas programs, there are substantial benefits. In addition to the aforementioned tax benefits, informed and selective investors have the potential to recover their initial investment and continue to receive cash distributions.
Active vs. Passive Income: The Tax Reform Act of 1986 introduced into the Tax Code the concepts of "Passive" income and "Active" income. The Act prohibits the offsetting of losses from Passive activities against income from Active businesses. The Tax Code specifically states that a Working Interest in an oil and gas well is not a "Passive" activity. Therefore, deductions can be offset against income from active stock trades, business income, salaries, etc. The (Act) made significant changes to the tax laws as they pertain to oil and gas investment. The Act attempted, for the most part, to shift more of the tax burden from individuals to corporations. The Act affected the ability of taxpayers to shelter income.
The Independent Producer: America´s determination to increase domestic reserves and be free of OPEC dependency has placed a tremendous need for capital on oil and gas companies. The burden is particularly heavy for independent producers whose funds are more limited than those of major oil and gas companies which fund their drilling activities with the sale of stock. Most independent operators, which drill the majority of the nation´s wells, are able to provide investors with cash flow and tax advantages through direct participation in oil and gas programs, thus avoiding the major oil companies´ corporate overhead. Domestic oil and gas development helps make our country more energy self-sufficient and reduces our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Investments in oil and gas can have many tax advantages which greatly improved the economics of these investments.
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