Oil and natural gas exploration has a tempting allure for many people, but a serious investor has to look at all the angles and weigh the pros and cons of investing in black gold. Investing in these forms of exploration do have sizable risks, and a dry well is not uncommon. Fortunately for an investor, the Federal government offers some inducements to ease the pain of the risk. There is an opportunity for favorable treatment under the Alternative Minimum Tax.
Alternative Minimum Tax (AMT) is assessed on adjusted gross income (AGI). Anything that is considered a “preference” item by the US Tax Code can be used to reduce regular income taxation. In 1992 Tax Act specifically included certain costs related to oil and natural gas exploration as preference items. Expenses such as intangible drilling costs, development costs, and depletion deductions can be a part of an overall tax reduction strategy within portfolio. Any investor wishing to reduce his or her tax liability may wish to consider oil and natural gas exploration projects for investment.
All of this stems from energy exploration being in the interests of the nation. However, an investor also must realize oil and natural gas exploration is indeed a risk. This is not something that a frivolous day investor should consider. Nevertheless, a serious investor with a mature outlook on the market may want to have oil and natural gas exploration as part of an overall investment portfolio. This is an investment that can provide both potential profit as well as good tax advantages.