The basic tax considerations involved in oil and gas exploration are as follows:

Dry Hole- All dollars invested are written off as an ordinary loss against your ordinary income in the year incurred, subject to the Alternative Minimum Tax limitations.

Producing Well- 75-85% (approx.) of the amount of your investment constitutes what are known as Intangible Drilling Costs, and are written off against ordinary income in the year incurred.

10-15% of the investment constitutes tangible drilling costs (well equipment). This portion of your investment is depreciated over a five to seven year period using the Accelerated Cost Recovery System, or expensed under Section 179, subject to limitations.

In some cases, approximately 10-15% of the investment is considered syndication/commission fees, which will be amortized over a five year period or expensed at the discretion of a tax advisor.

Example: $50,000 Investment

     $37,500 Deduction from ordinary income in first year

     $12,500 Depreciated over five to seven years

Depletion Allowance- In most cases, the allowance is 15% of gross income. This means that the 15% of all gross revenues received are non-taxable income.