Definition
Intangible drilling costs are the non-salvageable expenses of drilling an oil or gas well, such as labor and site preparation, that can be deducted quickly.
How It Works
IDCs typically make up a large share of a well's cost and can often be deducted in the first year rather than capitalized. For working interest owners, these deductions can offset active income, which is unusual among investments.
Example
An investor in a drilling program deducts a large portion of their investment as intangible drilling costs in year one.
Who It Applies To
Working interest owners in oil and gas projects.
Watch-Outs
The deductions are only as valuable as the underlying project, which carries real operational and commodity risk. Tax treatment depends on the structure and current rules.
