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Industry tax guide

Oil and gas tax and accounting

Tax planning for drilling, production and ownership interests.

Oil & Gas business environment

Oil and gas operators, non-operators and royalty owners share costs and revenue through joint operating agreements, with drilling programs that commit large sums before a well produces.

Two rules shape almost every return in the industry: the deduction for intangible drilling costs and depletion on production. How interests are held decides who can use them.

Compared with a general business

What makes taxes different for oil and gas

Intangible drilling cost deduction

IDCs can be deducted when paid, in full for independent producers.

Percentage depletion for independents

Independent producers and royalty owners deduct 15% of gross income on up to 1,000 barrels a day.

Working interest exception to passive rules

Working interests held directly are not passive, so losses offset other income.

Severance and ad valorem taxes

Producing states tax production through severance taxes and assess the minerals for property tax.

The rules in detail

Tax rules for oil and gas

Intangible drilling costs

Labor, fuel, chemicals and other costs to drill and prepare a well, which have no salvage value, can be deducted in the year paid instead of capitalized. Independent producers can deduct them in full; integrated oil companies deduct 70% and amortize the rest.

15% percentage depletion

Independent producers and royalty owners can deduct 15% of gross income from oil and gas production, on up to 1,000 barrels a day of average production, limited by taxable income. It can exceed the cost of the property.

Working interests and passive loss rules

A working interest held directly or through an entity that does not limit liability is not treated as passive, so drilling deductions can offset other income. Interests held through an LLC or limited partnership generally are.

Planning moves

Ways to save tax in oil and gas

  1. Deduct intangible drilling costs

    Prepaid drilling costs can be deducted in the year paid when the well is started within 90 days.

  2. Take percentage depletion

    It can exceed the property's cost basis over time.

  3. Hold working interests directly

    Direct ownership keeps drilling losses non-passive.

  4. Use bonus depreciation on equipment

    Tangible equipment acquired after January 19, 2025 qualifies at 100%.

  5. Plan royalty income

    Royalty owners use depletion and structure holdings for estate planning.

  6. Coordinate state taxes

    Severance taxes and state income tax are reconciled across producing states.

Working with OICPA

How we help

Service

Plan the drilling program's deductions

Intangible drilling costs, depletion and bonus depreciation on equipment modeled before wells are drilled.

Business Tax Advisory
Service

Investor and royalty owner returns

Working-interest and royalty income reported correctly on individual returns.

Personal Tax Advisory

Bookkeeping and reporting

The accounting behind the tax work

Reconcile ownership activity before tax preparation and coordinate resource-specific tax treatment with an experienced specialist.

The operating challenge

Joint-interest billings, revenue settlements, working interests, and equipment spending require consistent records across projects and entities.

The records that matter

Interest schedules, joint-interest bills, revenue statements, capital spending, and operating agreements give the review a practical starting point. We identify missing information before recommending changes.

What you can expect

  • A prioritized review of the industry-specific accounting issues above
  • A tailored reporting and document checklist based on your operating records
  • An agreed action plan connecting financial reporting, tax deadlines, and specialist coordination

Frequently asked questions

Can an investor deduct intangible drilling costs?

Yes, if the investor holds a working interest and the costs are paid. Holding the interest directly, rather than through a limited-liability entity, keeps the deduction from being passive.

Who gets percentage depletion?

Independent producers and royalty owners, on up to 1,000 barrels a day of average production. Integrated oil companies use cost depletion.

Are drilling costs a tax preference item?

Excess intangible drilling costs can affect the alternative minimum tax for some taxpayers, though independent producers have relief. We check this before you elect.

Related articles

References

  1. 26 U.S. Code § 263: Capital expendituresLegal Information Institute, Cornell Law School
  2. 26 U.S. Code § 613A: Limitations on percentage depletion in case of oil and gas wellsLegal Information Institute, Cornell Law School
  3. Publication 925 (2025), Passive Activity and At-Risk RulesInternal Revenue Service

Rules reflect federal tax law as of November 2026.