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Lev
Lev, Tax Advisor
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Towards the end of 2011 I invested $15k in an oil drilling

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Towards the end of 2011 I invested $15k in an oil drilling project (the Baskin Fee Prospect). I would like to know how to report this investment on TurboTax Online. They don't expect to start pumping oil for another couple of months, so I haven't received any income from it yet at this point. According to a letter I received at the beginning of January, the investment is 71.4% intangible, and 28.6% tangible. They will not be sending 1099s for 2011 since the wells weren't producing yet. They will also not be sending a K1 since I am not an actual partner in the company.

So, my question is how do I report it on TurboTax Online? I don't know what form it goes into or anything. (it was my first time doing this type of investment)

Thanks in advance for your help!
Submitted: 4 years ago.
Category: Tax
Expert:  Lev replied 4 years ago.

Hi and welcome to Just Answer!

You should not report your investment on your tax return.

What you need to do - keep all supporting documents - and you will be able to recover your original investment when you will start receiving income.

As long as there is no taxable income - your original investment will be your basis and is not deductible against your other taxable income.

 

Information that you received is correct - normally - you are filing Schedule C to report income and deductions from an oil or gas well in which you own a working interest directly or through an entity that does not limit your liability, check the "Yes" box on line "G". The activity of owning a working interest is not a passive activity, regardless of your participation.

However - as long as there is no income - that should not be your concern at this time.

Let me know if you need any clarification or other help with tax related issues.

Customer: replied 4 years ago.
Thank you for your answer. I am still a little bit confused. I was told that I would be able to deduct the full amount of my investment, most of which would be deductible for the year that the investment was made.

Although this is not where I got my original explanation, this site seems to be saying the same thing I was told: http://www.investopedia.com/articles/07/oil-tax-break.asp#axzz1l59KMrxQ

For example, if you read in the "Intangible Drilling Costs" section, it says "These expenses generally constitute 65-80% of the total cost of drilling a well and are 100% deductible in the year incurred. For example, if it costs $300,000 to drill a well, and if it was determined that 75% of that cost would be considered intangible, the investor would receive a current deduction of $225,000." A similar thing is said for the tangible costs, with the difference being that they "must be depreciated over seven years."

The same basic answer is given here: http://postamericana.wordpress.com/2011/10/30/tax-advantages-of-oil-based-real-estate-investments-part-1-%C2%AB-black-gold-flow/

Can you help clear that up at all for me? It sounds like you may be saying something different than what they are saying (and what I was told when I invested).

Also, since my question was specifically about how to report it in TurboTax, any help you could give there would be great.

Thanks!
Expert:  Lev replied 4 years ago.

Section 263(a) generally disallows a deduction for capital expenditures. However, § 263(c) provides that, except as provided in § 263(i), under regulations prescribed by the Secretary, a taxpayer may elect to deduct as current expenses intangible drilling and development costs ("IDC") in the case of oil and gas wells.

 

Treas. Reg. § 1.612-4 implements § 263(c) to permit an "operator" (one who holds a working or operating interest in an oil and gas property) to elect to deduct IDC in the case of oil and gas wells, in lieu of capitalizing such costs. This IDC option applies to all expenditures made by an operator for wages, fuel, repairs, hauling, supplies, etc., incident to and necessary for the drilling of wells and the preparation of wells for the production of oil or gas. IDC includes the cost to operators of any drilling or development work (excluding amounts payable only out of production or gross or net proceeds from production, if such amounts are depletable income to the recipient, and amounts properly allocable to the cost of depreciable property) done for them by contractors under any form of contract, including turnkey contracts.

 

Please see fro reference - http://edocket.access.gpo.gov/cfr_2009/aprqtr/pdf/26cfr1.612-4.pdf

 

So - if you holds a working or operating interest in an oil and gas property - you may elect to deduct as current expenses intangible drilling and development costs ("IDC") in the case of oil and gas wells.

Thus if you qualify - report such deduction on schedule C, party V - www.irs.gov/pub/irs-pdf/f1040sc.pdf

In your tax preparation software - you need to add schedule C and choose as not a passive activity.

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