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Tax Advantages

Investment Options

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Investment Options (Oil & Gas Project)

There are several different avenues available for oil and gas investors. These can be split into four major categories:

– Qualified Funds
– Partnerships
– Royalty Ownerships
– Working Interests

Each category has different levels of risks and separate rules for taxation.

  1. Qualified Retirement Accounts - While this method of investment contains the least amount of risk for the investor, it does not provide any tax benefits listed above. Investors will pay tax on all dividends and capital gains, just as they would with other funds.

  2. Partnerships - There are several forms of partnerships that can be used for oil and gas investments. “Limited Partnerships” are the most common, as they limit the liability of the entire producing project to the amount of the partner’s investment.

    These are sold as securities and must be registered with the Securities and Exchangen Commissions (SEC). The Tax incentives listed on the “Tax Benefits” page are available on a pass-through basis. The partner’s will receive a K-1 or Schedule C form each year detailing his or her share of the revenue and expense.

  3. Royalties - This is the compensation received by those who own the land where oil and natural gas wells are drilled. This income comes “off the top” of the gross revenue generated from the wells. Landowners typically receive anywhere from 15-20% of the gross production.

  4. Furthermore, landowners assume no liability of any kind relating to the leases or wells.  However, landowners also are not eligible for any of the tax benefits enjoyed by those who own working or partnership interests. All royalty income is reported on a Schedule E of the 1040.

  5. Working Interests - This is typically considered the most high-risk involvement in gas and oil projects. Risk is determined by their interest ownership, "general partner" or "limited partner".

    If the investor enters the project as a "general partner" he or she would assume a higher level of risk; however, all income and tax benefits would pass-through as "ordinary income" and "tax benefits would be towards ordinary income".

    If the investor chooses to be a "limited partner" and reduce their liability, he or she would receive all income and tax benefits as "passive income" and "tax benefits would be toward passive income". All income and tax benefits would be reportable on a Schedule C of the 1040 or K-1's.

Net Revenue Interest (NRI)

For any given project, regardless of how the income is ultimately distributed to the investors, production is broken down into gross and net revenue. Gross revenue is simply the number of barrels of oil or cubic feet of gas per day that are produced, while net revenue subtracts both the royalties paid to the landowner and the severance tax on the minerals this is assessed by most states. This tax is generally ranges from 2-9%. The value of a royalty or working interest in a project is generally quantified as a multiple of the number of barrels of oil or cubic feet of gas produced each day.

Example: Assume price of oil is $75 per barrel, severance tax is 7% and the net revenue interest (working interest percentage received after royalties are subtracted) is 85%. The well is currently producing 100 barrels of oil per day, which comes to $7,500 per day of gross production. Multiply this by 30 days (number usually used to compute monthly production); the project is posting gross revenue of $225,000 per month.

Then, to compute net revenue, we subtract 15% (land owner royalties) from $225,000, which brings us to $191,250.

Then the severance tax is paid from the net revenue (land royalty owners pay their own severance tax) which is 7% of $191,250, this brings the net revenue $177,862.50 per month, or approximately $2,134,350 per year.

Additional expenses will apply; such as, operating expenses, any additional drilling cost or re-entry cost must be paid out of the net revenue. Of course, if any new wells are drilled, they will provide additional tax benefits plus possible additional production and income for the project.


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American's Natural Energy
Phone: (909) 214-2002   Email: info@americasnatural.com

THIS MATERIAL IS DESIGNED FOR MARKETING PURPOSES ONLY. The information on these pages is intended solely for the benefit of participants in the oil and natural gas exploration and production industry, developers, other persons interested in operating relationships with America's Natural Energy, or persons who have pre-existing relationships with American's Natural Energy. The natural gas and oil interests are owned by limited partnerships located in Delaware.