Typically people begin worrying about taxes as their W-2s start to come in. But, to better prepare for next year’s taxes, now is the time to begin planning and there is one type of alternative investment that comes into favor. If you want to reduce your taxes, you have a few choices. You could reduce your income (no one picks that choice) or you can invest in programs that have tax benefits.
Energy Partnerships
Investing in energy partnerships would be one program with tax benefits and other pros and cons. On the positive side, accredited investors stand to benefit from significant tax advantages, including a deduction of around 70-80% of the investment in the first year, a 15% depletion allowance on monthly income from production revenue, and deductions for tangible drilling expenses (~20%) spread over seven years.
SOUTH SAN FRANCISCO, CA – AUGUST 30: The sun shines over towers carrying electical lines August 30, … [+]
Furthermore, energy partnerships often offer substantial monthly distributions to their investors, targeting 2-3% per month in the first 12 months, with an expected increase as the partnership hits flush production (all wells online & producing). Some programs stop there, they give you income for the life of the wells (20+ years) and other programs sell the now finished projects and investors get their capital returned with potential upside. In most cases, production income and the potential sale of consistently producing wells can result in attractive total returns of 1.5 – 2x within 36-60 months, excluding all tax advantages based on today’s pricing.
Drawbacks
However, there are also potential drawbacks to consider. Investing in energy partnerships requires a significant minimum investment ($100K), is limited to accredited investors, and has limited liquidity. Additionally, the oil and gas markets have and will continue to experience pricing volatility.
TOPSHOT – An illustration taken on October 14, 2021 in Dortmund, western Germany, shows flames of a … [+]
Investing in energy partnerships with controlled leases boasting proven reserves is paramount for mitigating investment risks. Such partnerships guarantee access to pre-assessed resources, minimizing the chance of investing in unproductive areas. Moreover, prioritizing partnerships with diversified well production, spanning oil, dry natural gas, and natural gas liquids, is crucial. This diversification not only ensures pricing edge but also safeguards against fluctuations in commodity prices.
Investing in energy partnerships is like finding a loophole in the tax code big enough to drive a solar-powered yacht through. It’s the perfect blend of saving the planet and saving your wallet – because who wouldn’t want to defer taxes while brightening up the world?
Right For YOU?
Investing in energy partnerships offers benefits such as diversification and the opportunity to take advantage of meaningful tax deductions and investor returns. Many institutional investors are eliminating or reducing investments in oil and gas exploration and production, setting the table for potentially higher pricing over a more extended period. However, it also comes with the drawbacks of higher minimum investments, limited accessibility, and volatility in energy prices.
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Before you invest, crunch the numbers. It is highly recommended to have a CPA case analysis performed before any investment in an oil and gas partnership.
Securities are offered through Arkadios Capital. Member FINRA/SIPC. Advisory services are offered through Creative Capital Wealth Management Group. Creative Capital Wealth Management Group and Arkadios are not affiliated through any ownership.
This material was created for educational and informational purposes only and is not intended as tax, legal or investment advice.
