The U.S. Tax Code provides specific incentives to encourage private investment in domestic energy production. Which ones apply depends on what you invest in — new wells being drilled, or wells that already produce — and how you hold the interest.
This page is for educational purposes only and does not constitute tax advice. Consult your tax advisor.*
These are not loopholes — they are deliberate incentives enacted by Congress to reduce American dependence on foreign energy and encourage private capital into domestic drilling and production. Some reward funding new wells. Others apply to owning production. Knowing which is which is the starting point for any conversation with your tax advisor.*
Both give investors an economic share of a working interest. The tax profile is different, and it is the first thing to sort out with your tax advisor.
| Drilling programExample: Legacy Gus-EFG LP (offering closed) | Producing acquisitionExample: Legacy Gus-EFG II, LP (current offering) | |
|---|---|---|
| What you're buying | A share of wells that have not been drilled yet | A share of wells that are already drilled, completed and producing |
| Drilling risk | Taken by investors | Already taken and paid for by the original owners |
| Intangible drilling costs (IDC) | Typically 65–80% of well cost; may be deductible in the year incurred* | None. The drilling was paid for before the purchase |
| Equipment | Tangible drilling costs may qualify for 100% first-year bonus depreciation* | The share of the purchase price allocated to equipment may qualify for 100% first-year bonus depreciation, subject to the used-property rules* |
| Reserves | Leasehold costs are recovered through depletion | Most of the purchase price is recovered through depletion as the wells produce — the greater of cost depletion or 15% percentage depletion each year, subject to limits* |
| Cash flow | Begins after the wells are drilled and completed | Can begin with the first distribution |
The W-2 offset under IRC Section 469(c)(3) is about the form of ownership, not the type of program. It applies to a working interest held directly, or through an entity that does not limit your liability, such as investor general partner units.*
Limited partner units limit your liability, so the exception does not apply. Income and deductions from LP units are generally passive: deductions offset passive income, and unused losses carry forward. This is true for drilling programs and producing acquisitions alike.*
*Summary for general education only. Treatment depends on the final structure of each offering and on your own situation; the Private Placement Memorandum governs. Consult your tax advisor.
Each benefit is marked with the kind of program it applies to.
The intangible expenditures of drilling — labor, chemicals, mud, grease, hauling, and other non-salvageable items — typically represent 65–80% of the total cost of a well.*
These costs may be 100% deductible in the year incurred, even if the well does not begin drilling until March 31 of the following year.*
IDC is a drilling-program benefit. When a partnership buys into wells that are already producing, there is no IDC to deduct — the drilling was paid for before the purchase.
Reference: IRC Section 263(c)
*Hypothetical drilling-program illustration based on a 32% federal tax bracket. Actual IDC percentages vary by project. Figures exclude land costs and offering fees. This does not represent a guaranteed tax outcome. Consult your tax advisor.
The portion allocated to physical equipment — wellheads, casing, pumps, and other salvageable items — is now eligible for 100% bonus depreciation in Year 1 under the One Big Beautiful Bill Act (OBBBA), signed into law on July 4, 2025.*
Previously, TDC was depreciated over 7 years using MACRS. Under the OBBBA, 100% bonus depreciation is now permanent for qualified property acquired after January 19, 2025 — meaning the full TDC amount can now be deducted in the same year as IDC.*
In a drilling program, combined with IDC, this means up to 100% of invested capital into the well may be deductible in Year 1.*
In a producing acquisition, bonus depreciation applies only to the share of the purchase price allocated to equipment — wellheads, tanks, separators, flowlines. Used equipment can qualify when the buyer has not used it before and does not buy it from a related party. The deduction is sized by the purchase price allocation, so it is a smaller share of the investment than in a drilling program.*
Reference: IRC Section 168(k) as amended by OBBBA; IRC Section 263(c)
*Hypothetical drilling-program illustration based on a 32% federal tax bracket and 100% bonus depreciation under the One Big Beautiful Bill Act (OBBBA). Figures exclude land costs and offering fees. Depreciation amounts vary by project; in a producing acquisition, only the equipment allocation is eligible. Consult your tax advisor.
Investors recover the cost of the reserves through depletion, taking the greater of two methods each year: percentage depletion, which may exclude 15% of gross income (not net income) from oil and gas production from federal taxation, and cost depletion, which recovers the investor's cost of the reserves as they are produced.*
Percentage depletion is available to independent producers and royalty owners, not large integrated oil companies. It applies to the first 1,000 barrels a day of average production (or the gas equivalent) and is limited to 100% of net income from the property and 65% of the taxpayer's taxable income.
In a producing acquisition, depletion is the main way the purchase price is recovered. In the early, higher-production years, cost depletion can exceed the 15% percentage rate.*
Reference: IRC Sections 611–613A
*Hypothetical illustration. Continues for the producing life of the well. Subject to eligibility requirements. Consult your tax advisor.
The Tax Reform Act of 1986 carved working interests out of the passive activity rules. When an investor holds a working interest directly, or through an entity that does not limit their liability — such as investor general partner units — deductions may offset salary, business income and professional fees.*
Limited partner units limit liability, so the exception does not apply. Income and deductions from LP units are generally passive: deductions offset passive income, and unused losses carry forward until there is passive income or the investment is sold. This applies to drilling programs and producing acquisitions alike.*
Reference: IRC Section 469(c)(3); Treas. Reg. §1.469-1T(e)(4)
*Hypothetical illustration based on a 32% federal tax bracket ($403,550–$512,450 taxable income for married filing jointly in 2026) and a $100,000 deduction. For limited partner units, the deduction can still offset other passive income, and any unused loss carries forward. Figures exclude land costs and offering fees. Individual results vary. Consult your tax advisor.
Beyond the primary benefits, oil and gas investors may also take advantage of these deductions.*
Ongoing well operating expenses — maintenance, workovers, field costs — are generally 100% deductible in the year incurred as ordinary business expenses.*
The cost of leases, mineral rights, and the reserve portion of a producing-well purchase is generally recovered through depletion as the wells produce, rather than deducted up front.*
In drilling programs, for investments made after 1992, IDC deductions are generally not treated as a tax preference item for purposes of the Alternative Minimum Tax (AMT).*
In our drilling programs and producing-well acquisitions, investors come in as general partners, which may allow early deductions to offset active income. Once the wells are flowing, the partnership converts to a Limited Partnership (LP). General partners take on greater liability until the conversion. Our SWD facilities are structured as LLCs, giving investors direct economic participation. Each passes its share of income and deductions through to investors on a K-1. Which deductions apply depends on the program — see the comparison above.*
Drilling programs: investments made before December 31 may qualify for IDC deductions in that same tax year, provided the well spuds by March 31 of the following year. Producing acquisitions: there is no IDC; timing follows when the partnership acquires the interest and places the equipment in service.*
Each investor receives a Schedule K-1 (Form 1065) reflecting their share of income, losses, deductions, and credits for the tax year — ready for your tax professional to incorporate into your return.
LegacyCrest structures each offering to maximize available deductions under current IRS guidelines while maintaining full compliance with federal securities regulations. Every offering includes detailed tax information in its offering documents.*
*All figures, percentages, and examples on this page are hypothetical illustrations only based on a 32% federal tax bracket. They do not represent actual or guaranteed tax outcomes. All hypothetical calculations reflect invested capital into the well only and exclude land acquisition costs and offering fees. The applicability and effect of tax benefits depend entirely on each investor's individual circumstances, including but not limited to income level, filing status, existing deductions, and state tax laws. Which benefits apply, and whether they are treated as passive or non-passive, also depends on the type of program and on how each offering is structured.
The information on this page is provided for general educational purposes only and should not be construed as tax, legal, or accounting advice from LegacyCrest Capital, LLC, or any of its affiliates, officers, or employees. Tax laws are complex and subject to change at any time without notice.
Prospective investors are strongly urged to consult with their own personal tax advisor, CPA, or attorney regarding the applicability and effect of U.S. federal, state, local, and foreign tax laws on their individual tax situation before making any investment decision. No representation or warranty is made regarding the accuracy or completeness of this information. Past tax treatment is not indicative of future tax treatment.
Common questions from accredited investors evaluating oil and gas direct participation opportunities.
A direct participation program (DPP) is an investment structure that allows accredited investors to hold an economic share of a working interest in oil and gas wells or midstream infrastructure — rather than buying shares of an energy company on the stock market. Investors participate in the actual economics of the project: they receive their proportional share of production revenue and the associated tax items, which flow through on a Schedule K-1. Which deductions apply depends on the program: a drilling program can pass through intangible drilling costs, while an acquisition of producing wells relies on depletion and equipment depreciation. This is fundamentally different from owning energy stocks, ETFs, or mutual funds, which do not pass through these tax items. LegacyCrest Capital structures its oil and gas programs as Limited Partnerships and its salt water disposal investments as LLCs, both designed to give investors direct economic participation.
It depends on the program and on how you hold it. In a drilling program, intangible drilling costs (IDC) — which typically represent 65–80% of total well cost — may be 100% deductible in the year incurred under IRC Section 263(c), and tangible equipment qualifies for 100% bonus depreciation in Year 1 under the One Big Beautiful Bill Act (OBBBA). In an acquisition of producing wells there is no IDC; the benefits come from bonus depreciation on the equipment share of the purchase price and from depletion. In both, the percentage depletion allowance under IRC Section 613A may exclude 15% of gross production income from federal taxation each year, subject to limits. Whether deductions can offset W-2 wages and business income depends on how the interest is held: the IRC Section 469(c)(3) exception applies to working interests held directly or through an entity that does not limit liability, while limited partner units are generally passive. Consult your tax advisor regarding your specific situation.
Yes. When a partnership acquires an interest in wells that are already drilled and producing, there is no intangible drilling cost to deduct — that deduction belonged to whoever paid to drill the wells. The benefits come from depletion (cost depletion or 15% percentage depletion, whichever is greater each year, subject to limits), 100% bonus depreciation on the share of the purchase price allocated to equipment, and deductible operating expenses, all reported on a K-1. In exchange, investors take no drilling risk, and cash flow can begin with the first distribution. LegacyCrest's current offering, Legacy Gus-EFG II, LP, is a producing acquisition. Consult your tax advisor regarding your specific situation.
Generally, no. The working interest exception in IRC Section 469(c)(3) applies only when the interest is held directly or through an entity that does not limit the investor's liability. Limited partner units limit liability, so income and deductions from them are generally treated as passive. Passive deductions can offset passive income, and unused losses carry forward until the investor has passive income or disposes of the investment. Consult your tax advisor regarding your specific situation.
A working interest gives the investor direct ownership participation in the well's operations and production. Working interest holders share in both revenue and costs, and receive the tax deductions tied to those costs — including IDC in a drilling program, equipment depreciation, depletion, and operating expense write-offs. When held directly or through an entity that does not limit liability, a working interest can also qualify for non-passive treatment. A royalty interest entitles the holder to a percentage of production revenue with no exposure to operating costs, but offers fewer tax advantages and no active income treatment. LegacyCrest programs give investors an economic share of a working interest, providing exposure to both production revenue and the associated deductions.
Every barrel of oil produced in the Permian Basin generates multiple barrels of produced water that must be safely disposed of by injection into approved subsurface formations. Salt water disposal (SWD) facilities collect fees for each barrel of water processed, creating a steady, volume-based revenue stream. SWD investments offer lower commodity price sensitivity than drilling programs because revenue is driven by water volume rather than oil price, and produced water volumes remain relatively stable even during commodity downturns.
Key factors include: whether management has a track record of co-investing their own capital alongside investors (alignment of interest); whether the firm provides third-party engineering reports and reserve analysis; the structure of the offering (direct participation vs. blind pool fund); geographical focus and operator track record; transparency of financial reporting and communication frequency; and whether the company has verifiable production history. At LegacyCrest, our founder has personally invested alongside our LPs and intends to continue doing so when possible. We provide comprehensive engineering analysis for each project, and investors receive direct participation in each project — not diluted exposure through intermediary vehicles.
Oil and gas investments carry significant risks that investors should understand before participating. These include commodity price volatility — oil and gas prices fluctuate based on global supply and demand, OPEC+ decisions, and geopolitical factors. Drilling risk — even in proven formations, individual wells may underperform geological projections or encounter mechanical issues. Regulatory risk — environmental regulations and permitting requirements can change. Liquidity risk — direct participation programs are illiquid and typically cannot be easily sold on a secondary market. Production decline — all wells experience natural decline curves over time. Investors should review the Private Placement Memorandum (PPM) thoroughly and consult with their financial advisor before investing.
As a participant in an oil and gas Limited Partnership or LLC, investors receive a Schedule K-1 rather than a 1099. The K-1 reports the investor's allocable share of income, deductions, and credits — including, depending on the program, intangible drilling costs, equipment depreciation, depletion, lease operating expenses, and production revenue. Whether these deductions can be applied against ordinary income depends on how the interest is held: working interests held directly or through an entity that does not limit liability can qualify for non-passive treatment under IRC Section 469(c)(3), while limited partner units are generally passive. K-1s are issued annually and should be reviewed with your CPA or tax advisor.
Minimum investment amounts vary by offering and are detailed in each project's Private Placement Memorandum (PPM). LegacyCrest offerings are available exclusively to accredited investors as defined by the SEC — individuals with net worth exceeding $1 million (excluding primary residence) or annual income exceeding $200,000 ($300,000 with spouse). The first step is a brief introductory call with our team to discuss your investment goals and current tax situation. Schedule a call to learn more about current opportunities.
In a typical oil and gas fund or energy REIT, your capital is pooled into a "blind pool" where the fund manager decides how and where to allocate it — often across dozens of projects you never see. In a direct participation program like those offered by LegacyCrest, investors know exactly which wells and facilities their capital is deployed into before they commit. You hold direct working interest in specific assets, receive itemized tax deductions on your K-1, and have visibility into the operational performance of your investment. This transparency and specificity is a core reason high-net-worth investors and their advisors prefer direct participation structures for oil and gas exposure.
High-income professionals — including physicians, attorneys, business owners, and executives — are often drawn to oil and gas for two different reasons. Drilling programs, when held in a form that qualifies for non-passive treatment, can allow intangible drilling costs to be deducted against active income in the year of investment. Producing acquisitions trade that up-front deduction for wells that are already producing, with cash flow from the first distribution and an ongoing depletion shield on that income. Either way, oil and gas is one of the few investment categories that addresses both income generation and tax efficiency. Consult your tax advisor regarding your specific situation.
Schedule a confidential call to discuss how oil and gas investment structures may complement your tax planning.