Oil and gas drilling investment
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Investing directly in drilling a well comes with one of the tax code's largest first-year deductions. Most of the cost, the intangible drilling costs such as labor, fuel and site preparation, can be deducted in the year you invest.
Because a working interest in a well isn't treated as passive, that deduction can offset wages and business income, not just other investment income. Once the well produces, a depletion allowance shelters part of the income.
How it works
Most of the cost of drilling a well (intangible drilling costs) can be deducted in the first year. A working interest isn’t passive, so the deduction can offset wages and business income. Production then qualifies for a depletion allowance.
What makes it hold up
- The operator’s statement of intangible drilling costs
- Proof you hold a working interest, not a limited one
- The K-1 or statements each year
Risks
Moderate. Working interests carry real liability and drilling risk; dry holes happen. Choose the sponsor as carefully as the write-off.
Questions to ask your CPA
- How much of the investment is deductible this year?
- Am I a working interest owner for the passive rules?
Common questions
What is a working interest?
A direct ownership share in drilling and operating a well, with a share of the costs and liabilities. Limited partnership interests that shield you from liability are treated as passive instead.
How much is deductible the first year?
Intangible drilling costs usually make up most of the cost of a well. The operator's statement shows the exact amount for your investment.
What is the depletion allowance?
A deduction against production income that reflects the oil and gas being used up. Smaller producers and royalty owners can often take a percentage of income each year.
What are the risks?
Dry holes, falling prices and real liability as a working interest owner. Choose the operator as carefully as the write-off.
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Education, not advice. Tax law changes and every situation is different, so confirm the details with your CPA or tax advisor before acting. This page was last checked against tax law as of October 2026, including the 2025 tax law, in October 2026.