I have worked for years converting highly complex and technical information into presentations aimed at the average person. Below is a sample of my writing from an investment prospectus:
Income Tax Consequences of Your Investment:
You should consult a tax professional to obtain advice on the tax consequences that may apply to you.
That being said, this opportunity will probably affect your tax circumstances in ways similar to how other investors in similar ventures have been affected. IRS Code gives you the option to deduct as a current expense all intangible drilling and development costs (“IDC”) incurred in connection with the drilling and completion of oil and gas wells. IDCs include costs for drilling, labor, fuel and hauling that are incurred in drilling and preparing wells for production. They do not include “tangible costs” for the acquisition of tangible property normally considered as having a salvage value, such as pumping units, storage facilities, separators and gathering lines. The IRS code specifically describes intangible costs as “non-passive”, and thus they can be taken as deductions against ordinary income and are not subject to “passive loss limitations”.
Using a one-Unit investment in this venture as an example shows that $8,947 of your total investment of $10,000 represents Net Proceeds for Well Operations. Under the Drilling Agreement, $3,780 of this money will be paid for intangible costs. This means that you might take a write-off in the current year for $3,780 as IDC. Unless you are subject to the Alternative Minimum Tax (“AMT”), you may apply this deduction to other ordinary income in the current tax year. Also assuming that you pay a combined marginal tax rate of 40%, this write-off could reduce the amount of your tax obligation by $1,512! You might think of this reduction in the tax you owe as a form of return on your investment, or you might prefer to think of it as a reduction in your contribution, but in either case it represents money you would have paid to the IRS anyway.
The Drilling Agreement also provides that $666 of Net Proceeds for Well Operations will be paid for “tangible costs”. This means that you might take a write-off in the current year for $133 as tangible costs (one-fifth of the five-year write down of tangible property). Again assuming that you pay a combined marginal tax rate of 40%, this write-off could reduce the amount of your tax obligation by an additional $53.
The next chunk of your investment, $4,501 goes to fund the leases for the well locations. Two-year term Mineral leases are real property, and might be depreciated over a ten-year basis in some cases. Assuming this is how your accountant would handle this portion of your investment, your write-off in the current year would be $450, further reducing your tax liability by $1,800, again assuming no AMT issues pertain.
The remaining $1,053 of your investment is divided into three parts, each of which are treated differently for tax purposes. The first part, $844 for Operating Costs, is treated as an ordinary, current expense deduction. Next, the $156 earmarked for Syndication Costs would be treated as a capitalized expense subject to a write-off over 5 years. In the current year, you would be entitled to one-fifth of this write-off, or $31. Finally, the Organization Costs of $53 would not be available for write-off until the venture had come to a close. Once again, using the 40% marginal combined tax rate, these deductions total $875, which represents another $350 you would not pay to the IRS.
Altogether, you could take a current-year write-off of $5,238, which would save you $2,095 in taxes figured at the 40% marginal combined tax rate.