Quite simply, Intangible Drilling Costs (IDCs) represent all expenses an operator may incur at the wellsite that don’t – by themselves – produce a physical asset for the producer. In the oil and natural gas business, those costs include things like labor and site preparation, renting drilling rigs – costs that have no salvage value after they are spent.
The passive loss exception enables working interest owners in oil and natural gas production to achieve some parity between their investments and those of corporate shareholders. By counting any working interest investment losses as active instead of passive, investors are able to treat the normal business deductions from their investment in the same way that a corporation would.
The percentage depletion deduction has been a part of the U.S. tax code since 1926. Depletion is a form of depreciation for mineral resources that allows for a deduction from taxable income to reflect the declining production of reserves over time.
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