The rising demand for oil and advances in technology have led to oil drilling projects around the world. Congress provides several tax advantages for oil drilling, according to M.R. Cox Inc. In addition, oil and gas revenues from domestic exploration are considered "one of the best" tax advantaged investments, according to the Energy Capital Group. Tax breaks for oil drilling include "Intangible Drilling Cost Deduction," "Tangible Drilling Cost Deduction," and "Small Producers Tax Exemption."
Intangible Drilling Cost Deduction
The intangible costs of oil drilling include incurred expenses for expenditures such as labor and chemical purchase. These expenses generally constitute between 65 to 80 percent of oil drilling projects and are 100 percent tax deductible during the first year of drilling, according to the Energy Capital Group. A company that invests $100,000 during the first year of drilling is eligible to deduct $75,000 in intangible drilling costs, according to Berkshire Moody, Ltd.
Tangible Cost Deduction
Tangible expenses for oil drilling projects include drilling equipment and the use of other technologies. Expenses that are incurred by oil companies for the purchase of drilling equipment or related technologies are eligible for 100 percent tax deductions. Tangible cost deductions for oil drilling projects can be claimed over a seven-year period, according to Berkshire Moody. Tangible drilling costs can also include land, oil tankers and well fittings. These materials can be used over an extended period of time.
Small Producers Tax Exemption
Small companies and individuals are eligible for tax deductions under the Small Producers Tax Exemption, which was developed by Congress under the 1990 Tax Act, according to the Energy Capital Group. The act was designed as an incentive to encourage small business owners and individuals into oil exploration and extraction projects. The act excludes large oil companies that produce over 50,000 barrels per day. Companies that own over 1,000 barrels of oil or 6 million cubic feet of gas do not qualify for Small Producers tax exemption. Tax deductions under this category are made according to acreage and well size.
Other Tax Deductions
Other tax deductions for oil drilling projects include "Lease Costs," which can be used to cover expenses such as purchase of leases, minerals, sales and legal expenses, administrative or lease operating costs. Businesses can deduct 100 percent of their expenses under this category, according to M.R. Cox Inc. In addition to the Small Producers Tax Exemption, small oil producers qualify for up to $9 "per well per day" for projects that pump 15 barrels of crude oil or 90,000 cubic feet of natural gas on a daily basis, according to M.R. Cox.
