In this sponsored interview, CPA‑attorney and tax influencer Mark Kohler introduces viewers to oil‑and‑gas investing as a tax‑advantaged wealth‑building strategy, focusing on the Intangible Drilling Cost (IDC) deduction. He likens the investment to real‑estate, outlining four key benefits: (1) cash flow from oil and gas sales, (2) a 15% depletion allowance that makes that portion of cash flow tax‑free, (3) an IDC write‑off that can deduct up to 80% of the investment (typically spread over two years), and (4) an exit opportunity where the well or a bundle of wells is sold to a major operator for a multiple of cash flow after three to five years. Kohler brings in Michael Maselli, CEO of REI Energy, who explains how their funds are structured – non‑operator participation in 75‑100 wells, acquisition of working‑interest percentages via land leases, and capital raising from accredited investors. Maselli provides concrete numbers: a $100 k investment generated a $62,813 IDC deduction (≈$21,980 tax savings at a 35% bracket) and $36 k of cash flow over two years, yielding a total realized return of about $58 k. He also describes the exit model, targeting 2‑to‑1 returns on capital over 3‑5 years, often selling for 36‑48 months of cash flow. Kohler emphasizes that the IDC deduction is deductible against ordinary income (W‑2, S‑Corp K‑1, Roth conversions, etc.), unlike many other tax losses that only offset capital gains. The conversation concludes with a reminder that investors must be accredited, conduct thorough due diligence, and recognize that oil‑and‑gas investing carries risks comparable to real‑estate or stock markets.
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Investing in oil and gas is just like investing in real estate. Fortunes have been made drilling for oil. Not only do I get cash flow, 15% of my cash flow isn't even taxed.
Investor invested $100,000 over two K1s. He was able to deduct about $62,813 off of his from the IDC deduction. So when if he's in a 35% tax bracket, then you know you're looking at $100,000 investment. The 62,000 DOL, it was an actual tax savings of $21,980.
Have you heard of the intangible drilling cost tax deduction? Have you ever even thought of investing in oil and gas? Well, over the last two to three years I've had more and more clients talk to me about this killer year end tax strategy. That could just be the trick for you. My name is Mark Kohler, a CPA attorney, bestselling author and influencer in the tax and legal space. And I love talking about tax strategies, wealth building, asset protection. And today I want to break down this intangible drilling cost deduction. Now here's the deal. Like I said earlier, a lot of people are looking for tax breaks. Maybe because they're doing a Roth conversion, maybe because they have a big gain on the sale of a business or a piece of real estate or stock and they need a tax deduction that they can use in different areas of their tax return. But we also don't want to just throw good money at bad. I don't want to just throw money at something to get a tax write off. I want to invest in something that makes sense. And man, if I can get a tax deduction to boot. Better yet, well, that's where the intangible drilling cost deduction comes into play. Now how do I like to look at this? I like to look at oil and gas or drilling. If you ever thought you would be investing in an oil well or oil and gas well, I like to think about it in comparison to a rental property. Right? Rental property is an investment with great tax benefits. Depreciation bonus, depreciation cost segregation, pass through cash flow tax free or tax deferred growth. I mean all sorts of variables, 1031 exchanges, opportunity zones, right? Real estate is an investment first with good tax benefits. While investing in oil and gas is good, just like investing in real estate, it's a good investment. Fortunes have been made drilling for oil, finding it, extracting it from the earth and selling it. That's the goal. Investing in that whole process can seem really foreign or mysterious or complex, but when you get down to it, it's a project to find oil or gas, get it out and sell it. And so the government, just like in real estate, has given us tax incentives that are pretty amazing on top of the fact it should be and is a good investment. So here's how I like to look at it. There's really four pieces to an oil and gas investment. First, you're going to get cash flow. That's why you're doing it. You want to invest in this project to get cash flow from the sale of the oil or gas. Number two, the government has given what's called a depletion allowance to incentivize people to invest in oil and gas projects. They've said any cash flow you get, 15% of it is tax free. Wow, that's pretty cool. So not only do I get cash flow, 15% of my cash flow isn't even taxed. Number three, depending on how you invest in one of these funds or partnerships, you're allowed to write off get a deduction for the intangible costs of drilling. This could be the cost of the very drilling rig itself, the wages, the site prep, cement, and the list goes on and on. So as being a partner in the project, just like you're an investor, you're a partner in the project, you're able to write off up to 80% of your investment in this project. Usually it happens over the first two years because it takes a while to get these drills completed, these wells working and producing. And so you get to deduct those costs. Much like if you go back to real estate, you're going to be able to depreciate the rental property that you bought, you're able to write off the equipment to drill the well. Now finally, the fourth benefit in this process is that at the end of the day, the well is going to create cash flow. And a lot of these companies doing these drilling projects within the third to fifth year say, hey, we've got enough oil out of this or enough gas. We, we produce some cash flow. Now we can sell the well or bundle of wells in a fund to Chevron or these big oil companies because we've now targeted a certain stream of cash flow and we've figured out how much oil and gas is really there. So we can sell the future cash flow from these wells to one of the big dogs and exit the project. So those four benefits, the cash flow, a tax free portion of the cash flow, and Then number three, the write off of all the equipment. And then number four, selling my actual share of the wells at the end of the day. And the rates of return can be phenomenal. All right, now if that sounded like a lot of garbage goop and I am not an expert on running an oil rig, that's for sure. I want to help my clients find tax write offs that make sense. So I want to bring in an expert now. And let's unpack this a little bit more and get some real world examples. Okay, folks, this is the part I promised you. We were going to bring in even a bigger expert than I may try even to hold myself out as we've got our sponsor, REI Energy, who's been in this space for years and they are incredible. We've got the CEO Michael Maselli here, a good friend of mine. He speaks at my events. I just love him because he's just got a wealth of knowledge. And Michael, thanks for being here.
Thank you very much for having me.
Mark, I was going to joke around because I wanted everybody to hear your cool voice because if you're going to do oil and gas, you got to have a guy with a Texas accent.
Well, I definitely have that.
I love it. I love it. You're a good man. Oh, my gosh. Well, tell us now, and I want to be transparent. I have invested myself just this year in a fund sponsored by REI Energy. They are just yesterday I called him and he's like, yeah, we got another fund. We're drilling. And I'm like, are you out on the drill right now? But I don't think you get out and get oil all over you and drill. You got guys that do that.
So, yeah, I used to do it quite a bit, but, you know, and I still love to go out to the well sites. I've been in the business now over 36 years. I've drilled both domestically and internationally and drilled in South America, drilled the deepest discovery in the country of Argentina, which we sold later on and you know, drilled in Canada. And for the last probably 10 or 11 years, we've been very active up in the unconventional plays such as the Bakken up in North Dakota, also in Oklahoma, West Texas. So we're pretty active company.
Wow. I love it. Well, I've been unpacking for my, my viewers and my followers the, the whole strategy. But I wanted to kind of summarize the practical experience of someone that says, you know what, I need the write off. I love the cash flow. I like the fact I'm going To be able to sell my interest and get a return on capital, even a portion of or even the same amount or double or whatever, you know, and every well, everybody, you've got to do your own research and your due diligence. But because every fund and drilling sites are going to be different. Of course, everybody knows that. But if you could give us an example of one of your Oklahoma sites and what they, what the experience is like, how many drills are done, what's a fund look like when, when the investors come into it or the partners?
I should say, well, let me explain the type of programs that we offer. You know, we want diversification in our funds because obviously whenever you're drilling a well or whether it's oil and gas, real estate, I mean, there's always problems and there's always risk in any type of investment. And so what we try to do is minimize that risk by having multiple wells. So in our funds, the last fund that we did, we're going to drill right at about 75 to 100 wells. And we participate as a non operator. We are not the operator, but we participate under companies such as Marathon, xto, Mewburn Oil and Gas, Crawley, which are all large companies. And how we source our projects is that when a company goes out and gets ready to drill a well, they run the title opinion and determine who owns the interest. And then they send out an invoice or in our business called an afe. And so you have basically three choices. As a person that owns an interest, you can participate for your interest or you can sell your interest or you can go non consent. If you go non consent, you just give it to the operator. So most people that own interest in wells, and when I say bigger companies, usually the operator only owns about 50% of the well himself or maybe a little bit more. But so there's about 40% in there that's owned by other companies or other partnerships. And when they get ready to drill, so they'll send out this invoice. And it may be, say a drilling unit is 1280 acres. So if you own 128 acres in that drilling unit, you own 10% of the well. These wells are 20,000 foot wells. You know, they're 10,000 foot vertical and 10,000 foot horizontal. And they cost around $10 million to drill one of them. So you get an invoice for $4 million for your share. And some people or individuals that have owned the interest in the past, or partnerships, you know, they'll sell that interest. So what we do Is we, when a well gets proposed, we through our land department find out who are the working interest owners. And then of course, we make offers to those groups and we're able to pick up interest. Now in Oklahoma, we've been leasing land there. So as I was saying, if we lease 128 acres in a 1280 acre drilling unit, then we own 10% of that well. So we participate for our acreage position.
Okay.
That's how we get into the middle of these, these opportunities.
And that's where your fund comes in. Because you're going to say, hey, if you have been doing this for years, you may invest directly as an individual, but in the last few years you've been, hey, we're going to create a fund, we're going to raise capital with partners like me or whoever, a taxpayer that's like, hey, I want to participate in this, in this investment and I'll own a part of the rig. So they, you create the fund of how much money you're trying to raise, you send out the, the, all the normal disclaimers and these accredited investor letters and those that can participate based on their investment status, they throw in their money into the pot and then your fund goes and plays a position in that well, in that, that drilling project. Is that a fair summary of what
it looks like that covers it? I mean we, we basically, and we, and we want to do that over and over. We want to have somewhere between on a minimum of probably 30 wells in
a fund, the tax benefit, the cash flow and the exit. Those being the three main benefits here. Just give us some ballparks based on the funds that you've done in the past of what the tax deduction typically looks like in the first year or two of an investor. Let's go there first. What is the tax deduction typically in the funds you're doing?
Okay, usually our tax deductions are spread out over two years. So you know, we get say 30 to 50% of the intangible drilling cost deductions in year one and then we get the remainder in year two because it takes about four or five months to drill a well. So sometimes they go over the end of the year. And so that's why we, we say we get them. And I can tell you an exact, an example of one of our funds. An investor invested $100,000 over two K1s. He was able to deduct about 60, $62,813 off of his from the IDC deductions. So when, if he's in a 35% tax bracket, then you know, you're looking at $100,000 investment. The $62,000, it was an actual tax savings of $21,980.
Gotcha, gotcha. Okay, so that's the first benefit. I invest 100 grand and I'm going to get somewhere from 30 to 80% in a tax deduction over a two year period, let's say. And then cash flow, once it starts producing. What's the average cash flow per year on an investment?
Well, when our funds have averaged, they all, they're all different depending on when the funds come online because they don't, all the wells don't come online at once. So the wells come online over the first year. But in this particular instance, in over, say two years, he was able to get about $36,000 in cash flow. That's what he got back. So that's actual cash flow. So if he takes the $21,000 tax savings and adds that to his cash flow, he's looking at $58,712, which is a real, you know, that's, that's an actual realized return on his capital. Wow.
And then, yeah, and then the kicker is you're going to sell the well to Chevron for the remaining piece. And then what you sell the well is there, do you do. What's the exit look like?
Well, what our business model is, we want to stay in these funds three to five years. And the reason being is in unconventional wells you're going to get, when I say unconventional, I mean horizontal wells. You're going to get about 50% to 60% of the reserves out of the well in that three to five year period. So we want to sell it while we still have good cash flow. And usually you can sell that for a multiple of cash flow depending on the wells. I mean, we've seen it sell as high as 48 months worth of cash flow. But, but you know, I would say 36 months is a good round number on the cash flow. So what we're looking to do is make about a 2 to 1 return on our investment in that 3 to 5 year period, not counting the tax deduction.
Well, Michael, thank you so much for sponsoring this education. I've been trying to get this out to so many viewers and taxpayers around the country. And you're just a wealth of knowledge, REI Energy out there doing it. 30 plus years of experience. Michael, thanks for being with us. I sure appreciate it.
Well, thank you, Mark. I enjoyed being on it. And look Forward to seeing you at your show in Phoenix.
We'll see you there. I'm watching from the back of the room, too. I love your presentation.
All right, thanks.
Thank you. When I have clients that have a gain, they may have sold property again, want to do a Roth conversion, sold a business, maybe their business themselves, the S Corporation they have is doing well. They've got a big fat K1. Selling stock at a loss is a capital loss that's not going to be deductible against 80% of our other types of income. It's a capital loss. And as many of you know, it's going to only be deductible against capital gains in the stock market. And I'm going to be left with a $3,000 a year carry forward capital loss benefit. It's terrible. Right? So clients are looking for write offs that make sense that can be deducted against ordinary income. That's what we're trying to eliminate is that ordinary income tax. And so even being in a real estate position with cost segregation, if I'm not a real estate professional, those losses might just be carried forward as well. Well, this is what I like about the intangible drilling cost deduction. You don't have to be an oil rig expert, you don't have to be an oil rig professional. And it's not a loss that's going to carry forward for years and years and years. It's only deductible against other capital gains. The intangible drilling cost deduction is deductible against your W2, it's deductible against your S Corp. K1, it's deductible against a Roth conversion, Social Security, any other income. That's where you get to take this write off. Pretty darn powerful. So running an example, let's say someone invests 200 grand and they're looking for some big write offs at the end of the year. Man, they could end up with maybe 30% or 45% this year and then the rest of it next year up to 80%. So, man, if I wanted that 60 to $80,000 write off this year, the rest next year, get some cash flow, a good chunk of it or a good piece of it tax free, and then sell out and get my original 200 grand back or more. Crazy. Well, just an idea. Do your due diligence. You're going to have to be an accredited investor to get into many, many of these funds. But when you can understand the project, understand the company, you're going to be working with and be able to do your due diligence and understand that all these types of projects. Rental property has risk. Invested in the stock market has risk. And investing in oil and gas has risk. Do your homework. But if you're looking for a write off, I just wanted to lay one out for you on a silver platter. This could be the one for you.
