(0:00) But we’re going to talk about the tax advantages of oil (0:03) and gas, you know, building an energy portfolio using money (0:07) that you’d normally go to pay federal (0:09) and state income taxes with. (0:12) It’s unique because most countries (0:14) in the world the government owns the oil and gas reserves (0:18) or the state-run, you know, government-owned oil (0:21) and gas companies own it. (0:23) But here in the United States not only do the private sector (0:27) on it and individuals can own oil and gas reserves, (0:30) but they actually incentivize you (0:32) through significant tax deductions.

(0:35) And it’s been no secret, you know, Biden has wanted (0:39) to get rid of these, Obama wanted to get rid of them. (0:42) And, but, and, you know, Biden calls them a subsidy. (0:46) It’s not really a subsidy, it’s a business deduction, (0:50) Schedule C business deduction.

(0:51) So very, very straightforward, very useful. (0:55) But in 2021 they were, you know, (1:02) debating the Build Back Better tax bill. (1:06) And the Democratic Congress actually rebuffed them and said, (1:10) no, we’re going to keep them, keep the oil and gas deductions.

(1:13) They’ve been in the tax code for over 100 years since 1913. (1:18) And there’s enough states with Democratic congressmen (1:22) and senators with, in oil and gas states that they kept them. (1:27) And so now with the Republican legislature we feel (1:31) like we’re pretty safe.

(1:33) You know, you’re never sure, (1:34) but right now we’re pretty safe with these deductions. (1:37) So these are deductions that are good (1:40) against any ordinary income. (1:43) You can reduce your adjusted gross income.

(1:46) You can offset capital gains, dividend income. (1:49) Anything is deductible with these. (1:51) And how that works is 80% is your intangible drilling costs, (1:57) which is anything you use, you know, which is non-tangible (2:01) for the drilling, vendors, equipment, rentals.

(2:06) And so this is 100% deductible (2:09) and comes right off your adjusted gross income. (2:13) The 20% is for anything tangible, (2:17) anything you can touch or kick or hold. (2:19) It’s for your tangible wellhead equipment, pump jacks, (2:23) pipes, all your equipment.

(2:26) And that, in the old days, we used to depreciate it. (2:29) Now with the Tax Cuts and Jobs Act of 2017, (2:33) we have what’s called bonus depreciation. (2:36) So you can actually deduct that 100% the first year.

(2:40) So the whole thing becomes deductible. (2:43) This year in 2023 they stepped it down to where 80% (2:47) of that is deductible, which I’ll show in a minute. (2:50) But that can be solved through the Section 179.

(2:55) So you can still take 100% deduction. (2:58) Then another significant one is the, (3:01) you not only get a tax deduction going into the acquisition (3:05) of oil and gas reserves, but as you’re producing them back, (3:09) you get a percentage depletion allowance. (3:11) They used to have a cost depletion (3:14) where you recovered your costs over time, you split it up over (3:18) the, divided up your reserves and split it.

(3:21) But now everybody just uses percentage depletion. (3:24) So 15% of your income, gross income, is non-taxable. (3:29) So if you are finding the reserves that you’re looking for, (3:32) the government ends up paying, through tax deductions, (3:36) 100% of your oil and gas reserves.

(3:39) It’s incredible. (3:40) In fact, if you find enough reserves, (3:42) they actually pay you more than what you put (3:46) in for the acquisition. (3:49) So tremendous tax deductions.

(3:51) This has been in the tax code. (3:53) This is a little bit hard to see here, but this has been (3:58) in the tax code since 1986. (4:02) I think I went one, yeah, there we go.

(4:04) So the Tax Reform Act of 1986 is where they split (4:09) out the passive and active investments. (4:12) You remember back in the 70s and 80s (4:14) when they had the limited partnerships? (4:17) Well, those were really just brokers taking the working (4:22) interest ownership, the individual percentage ownership (4:26) in the wells, and then wrapping them in a partnership. (4:29) And then those partnerships, you know, had G&A, (4:32) they had management expenses.

(4:34) You know, a lot of them had carried working interest, (4:36) back ends, and so the partnerships didn’t really work (4:40) that well because they were so heavily loaded. (4:43) Well, then with the Tax Reform Act of 1986, (4:47) they eliminated your ability (4:50) to deduct those against your income. (4:53) You could only deduct limited partnerships (4:55) against passive income.

(4:57) And so that took a lot of the incentive out of, you know, (5:02) real estate and those types of limited partnerships. (5:05) But they exempted the working interest form of ownership (5:09) from those passive loss rules. (5:11) So if you buy a 1% of a drilling project, you’re going to be able (5:15) to deduct that as an active investment.

(5:18) And so it’s a very unique deduction for investing. (5:23) It’s, even though you’re actually literally passive, (5:27) you’re deemed to be active. (5:28) So you’re deemed to be an oil and gas producer.

(5:32) And so to that extent, you can deduct it (5:34) as a business deduction on your Schedule C. (5:37) So this has really been a great incentive for investing (5:41) in drilling of oil and natural gas reserves. (5:46) The, again, the Tax Cuts and Jobs Act enhanced it, (5:50) gave the bonus depreciation, (5:53) and then they also enhanced the Section 179. (5:58) And 179 just says that if you’re not depreciating (6:02) over a certain amount of total depreciation (6:06) that you can take that the first year.

(6:09) And so they increased the amount (6:11) from a half a million to a million. (6:13) And so most of our investors are just taking the 179. (6:18) So last year, they were taking the bonus depreciation.

(6:22) This year, they stepped it down to just 80% (6:24) of your tangible equipment. (6:26) And so a lot of people will take the 179 this year. (6:30) So still 100% write-off.

(6:32) And then how that works is on your Schedule C form, (6:36) you’re going to put in your total investment. (6:39) Here, we just put in 50,000. (6:41) So 40,000 for your intangible drilling costs.

(6:45) That’s 80%. (6:47) And then the other 20%, 10,000, (6:50) is going to go under your depreciation. (6:52) And then that comes around to your front page (6:55) and then reduces your adjusted gross income.

(6:58) So whatever tax bracket you’re in, that’s what you’re, (7:01) it’s going to lower your, or that’s what you’re going (7:04) to get back as a tax refund. (7:06) Like if you put in 100,000 and you’re (7:08) in a 30% tax bracket, you’ll get 30,000 back. (7:12) And then it also can put you into a lower tax bracket.

(7:16) I had Mike Weaver out of Tucson, Arizona, called me last year. (7:22) And he had gotten a stimulus check in the mail for $1,200. (7:27) And he said, I called my CPA and said, (7:30) how did I get a stimulus check? (7:32) And his CPA said your, that your royal investment brought you (7:37) down below $75,000 in income, and that generated a check.

(7:42) So he sent me another check. (7:47) So, so again, how that works is if you put in 100,000 (7:53) into any drilling project, I’m not, you know, (7:55) talking about any specific one. (7:57) But if you put in $100,000 into any type of drilling, (8:02) actual, by a working interest in drilling, then that is going (8:07) to reduce your federal tax adjuster gross income (8:10) by 100,000.

(8:12) So if you put in, or if you earn 200,000, then you’re going, (8:16) it’s going to look like you earned 100,000. (8:19) And so you’re going to pay 30,000 less in taxes, (8:23) even though you’ve made the 200,000. (8:27) And then, excuse me, (8:29) and then the state tax is also applicable.

(8:32) So if you’re in one of the high income states, New Jersey, (8:36) you know, California, New York, it’s even more enhanced (8:40) because of the high, you know, state taxes.