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How do I deduct intangible drilling costs on my taxes?

Customer Question
How do I deduct Intangible...
How do I deduct Intangible drilling costs on my personal income tax?
Submitted: 9 years ago.Category: Tax
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1/4/2008
Tax Professional: jgordosea, Enrolled Agent replied 9 years ago
jgordosea
jgordosea, Enrolled Agent
Category: Tax
Satisfied Customers: 3,161
Experience: I've prepared all types of taxes since 1987.
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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.

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Customer reply replied 9 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.
Tax Professional: jgordosea, Enrolled Agent replied 9 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.

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Customer reply replied 9 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?

Tax Professional: jgordosea, Enrolled Agent replied 9 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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jgordosea, Enrolled Agent
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