A short conversational YouTube video (April 25, 2023) hosted by Sarah Sullivan discussing how oil and gas investments can provide large up-front tax deductions. The speakers explain the historical origin (1986 tax law introducing IRC §469 passive activity loss rules) and a carve-out for oil & gas working interests that allows those losses to offset ordinary income when liability is not limited.
Chapters
Let's talk about oil and gas. So you know a lot of oil and gas investments say hey, you get 75 to 100% tax deduction in year one. And so we go, oh, that sounds great. Can you kind of give us the background of why there's a tax advantage to oil and gas and then how, let's go into how people can use it.
Big business. That's how ultimately it was. It was, it was lobbyists. So in 1986 the tax law introduced code section 469, which is pass back to the loss rules, said any activity that you're passive in can only offset passive income. So what they're trying to get away from is prior to 1986 you invested in a multi family and you had a million dollar loss in it. You could offset your W2 income. You didn't even have to be activated because there was no distinction between the two. So in 86 they created this passive activity loss rules and as part of that tax code they created a carve out for oil and gas. Lobbyists did a really good job of being able to, to create this position and what it ultimately ended up doing was it gave this carve out. That said, if it's an oil and gas working interest and you invest in a way that does not limit your liability, you can take the losses from those investments against ordinary income.