As doctors, we are well-acquainted with the importance of sound financial planning, asset diversification, and tax-efficient strategies. Now more than ever, oil and gas remain integral to global energy consumption. While commodity price fluctuations introduce volatility, they can also create significant profit potential during upswings. Oil and gas investments present a unique opportunity to not only generate long-term revenue streams but also leverage substantial tax benefits. And this is where Eckard Enterprises comes into play…
What is Working Interest?
You may recall that mineral rights owners don’t pay any expenses for drilling. Working interest is somewhat opposite – you participate (financially) in the drilling and completion of oil and gas wells. Working interest owners receive a much larger percentage of the proceeds from the sale of oil & gas, but are also on the hook for any cost overruns that exceed what is outlined in the AFE, or Authority for Expenditure. This is a document produced by the oil company that outlines the estimated costs of drilling a well.
Most investors seeking working interest are typically looking for tax deductions. The reason these deductions exist is because investing in drilling wells is high risk and has the potential to result in the loss of capital. So, how does Eckard stay in business? As horizontal drilling technology has continued to improve dramatically, the risk of uneconomical wells has been lowered significantly.
Horizontal drilling (also known as unconventional drilling) has enabled oil and gas companies to target specific formations beneath the surface. Unlike vertical wells (conventional drilling), there is a far lower chance of running into “dry holes,” a term for when reserves of oil and gas are missed entirely. Technological advancements in the industry have improved the ability to both steer the drill bit accurately through targeted formations and maximize the amount of hydrocarbons extracted. The concern is less about dry holes, and more about amplifying economic returns and improving the well. However, it’s still important to recognize that there is a significantly higher degree of risk present in working interest opportunities compared to mineral rights ownership.
Let’s get into one of the most compelling reasons to own working interest: the tax advantages.
Key Tax Advantages for High-Income Earners:
One of the most attractive aspects of working interest investments is the range of tax incentives available:
- Intangible Drilling Costs (IDCs): These costs (e.g., labor, chemicals, equipment rentals) can be deducted in the year incurred. This is important, because these types of costs typically constitute 65-80% of the total drilling cost. For example, a $100,000 investment where 70% qualifies as IDCs results in a $70,000 deduction. At a 35% tax rate, this translates to $24,500 in tax savings.
- Tangible Drilling Costs (TDCs): Equipment such as rigs and pipelines are capitalized and depreciated over time.
- Depletion Deductions: Investors can deduct depletion expenses related to the reduction of a well’s production capacity.
- Bonus Depreciation: As of 2024, 60% of the purchase price of qualified assets is eligible for immediate deduction under Section 168(K).
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These tax incentives make working interest investments particularly attractive for high-income professionals seeking to offset substantial taxable income.
Educating Yourself on Oil & Gas
For investors seeking diversification outside of traditional markets, oil and gas ownership provides an asset class with unique risk-reward characteristics. While short-term risks exist, the potential for long-term rewards and tax efficiency makes these investments a favorable consideration.
Eckard Enterprises has 40 years of experience helping medical professionals and other accredited individuals directly own tangible assets in the US energy industry. Their team of engineers, geologists, and landmen have the depth of knowledge required to select oil & gas assets that align with their high standards. They focus their energy not only on providing high-quality assets, but also providing thorough education so that clients gain a true understanding and awareness of an industry they may not be familiar with.
If you would like to learn more about working interest or other commodity investments we offer, fill out the form on this page to have one of our experts reach out or simply call (800) 527-8895.
You can also check out my recent webinar with Eckard Enterprises right here!
