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jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3159
Experience:  I've prepared all types of taxes since 1987.
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How do I deduct intangible drilling costs on my taxes?

Resolved Question:

How do I deduct Intangible drilling costs on my personal income tax?
Submitted: 8 years ago.
Category: Tax
Expert:  jgordosea replied 8 years ago.

You may elect to deduct all, or a portion, of your share of intangible drilling costs currently or to capitalize all, or a portion, of the intangible drilling costs and amortize them ratably over a 60-month period beginning with the month or months the costs were paid or incurred.

You elect to deduct Intangible drilling costs as a current business expense by taking the deduction on your income tax return for the first tax year you have eligible costs. No formal statement is required. For oil and gas wells, your election is binding for the year it is made and for all later years.

If you file Schedule C (Form 1040) for the activity, enter these costs under "Other expenses."

If your interest is that of a limited partner, report your deduction or amortization amount of intangible drilling costs on a separate line in Part II of Schedule E to Form 1040, netting the deduction for intangible drilling costs which you elect to deduct or amortize against your income from the partnership.

I hope this helps for deducting intangible drilling costs.

Customer: replied 8 years ago.
Which line number - I don't use the business form Schedule C as this investment is as a private investor versus a business expense.
Expert:  jgordosea replied 8 years ago.

If you are a partner or shareholder in an S corporation you will receive Schedule K-1 and use Schedule E for that income. You will report your deduction or amortization amount of intangible drilling costs on a separate line in Part II of Schedule E to Form 1040.

I hope this helps to clarify.

Customer: replied 8 years ago.

Thus far there has been no income. It is an investment in a limited partnership for five wells. Is there a way to deduct this on line 20 or line 27 of the itemized deduction sheet?

Expert:  jgordosea replied 8 years ago.

The IDC are an expense of the business and should be deducted against the business income (whether on Schedule C or Schedule E). If you are saying that you get a Schedule K-1 with zero income then the procedure described above applies for Schedule E.

Whether or not the loss is deductible will also depend on passive loss rules as you have described yourself as an investor. If you are classified as a general partner you are not subject to the Passive Activity Loss Rules. As you are a limited partner and do not materially participate in this activity you are only be able to deduct these losses when you have passive income. See http://www.irs.gov/businesses/small/industries/article/0,,id=98881,00.html for more information and links.

Form 8582 is used to record, carry forward and claim the allowable loss from limited partnerships in which you do not materially participate.

I hope this helps to clarify the correct treatment of IDC for a limited partnership interest.

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