intangible drilling costs


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Intangible Drilling Costs

Expenses a company has when it drills for oil or natural gas. Intangible drilling costs are sometimes convenient for a company's tax purposes because it can deduct intangible drilling costs in one year when the company perhaps found little or no oil from profits made in a different year when the company does find oil.

intangible drilling costs

Expenses incurred while exploring for gas, geothermal, or oil reserves. These items may be expensed in the year incurred, or they may be capitalized and deducted throughout a period of years. Intangible drilling costs are an effective means of reducing taxes because they can be used to offset income in a single year even though the costs were incurred in order to produce or develop a capital asset (energy reserves) that will in turn generate income for many years. Costs for fuel, preparation of a site, and wages are examples of intangible drilling costs.
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Otherwise, any type of contract (including a turnkey contract) between the operator and contractor may be used without jeopardizing the classification of expenditures as intangible drilling costs.
If intangible drilling costs are capitalized, they may be recovered through depreciation or depletion (see Q 7850, Q 7528).
Thus, the election to capitalize or expense intangible drilling costs is made at the partnership level by the general partner.
Intangible drilling costs incurred with respect to individual nonproductive wells may be taken as a deductible loss for the first taxable year in which such nonproductive well is completed.
If the limited partnership elects to capitalize intangible drilling costs, how does a limited partner treat his allocated share of such costs?
A limited partner may recover his share of the cost of a particular item of intangible drilling costs that is not represented by physical property through the allowance for depletion.
If intangible drilling costs are incurred under a drilling contract (e.
If the limited partnership elects to expense intangible drilling costs, how does a limited partner treat his allocated shares of such costs?
On the other hand, if the partnership elects to expense intangible drilling costs, each partner has two choices as to how to treat his allocated share of intangible drilling costs: (1) take a current deduction for the allocable share, or (2) elect to amortize such costs ratably over a 60-month period.
Only a portion of the intangible drilling cost is considered a preference item.