intangible drilling costs


Also found in: Dictionary, Medical, Acronyms, Encyclopedia.

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.
Mentioned in ?
References in periodicals archive ?
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. (6b)
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.
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.g., a turnkey contract), the intangible drilling costs under the contract must be allocated between depletable and depreciable classes of costs for purposes of calculating depletion and depreciation at the partner level.
An electing large partnership generally calculates depletion and depreciation deductions (including those representing capitalized intangible drilling costs) at the partnership level.
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.
Question--What is the tax treatment of an intangible drilling cost?