Energy investing has always offered unique tax benefits, but with the One Big Beautiful Bill (OBBB) signed into law in July, the landscape changed again.
For investors considering oil and gas, understanding how deductions and depletion allowances work is critical.
These provisions are not only long-standing features of the tax code but now interact with newly expanded incentives designed to boost U.S. energy production.
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What the OBBB means for energy investors
The OBBB was designed to increase domestic oil and gas production and reduce dependence on foreign sources. Among its notable provisions:
Effective January 20, 2025, and made permanent, was 100% expensing for tangible drilling equipment and related assets placed in service during the year (bonus depreciation).
The qualified business income (QBI) deduction was made permanent. Under this provision, taxpayers can deduct up to 20% of qualified business income from pass-through entities, such as partnerships, S corporations and other qualifying pass-through structures, under IRC Section 199A.
This deduction is generally claimed using Form 8995 or Form 8995-A, depending on income level and complexity.
The Section 179 expensing limit and phaseout thresholds were changed. The OBBB increases the maximum deduction from $1 million to $2.5 million and the phaseout threshold from $2.5 million to $4 million of property placed in service during the year for taxable years beginning after 2024; both amounts will be indexed for inflation for taxable years beginning after 2025.
The OBBB also introduces a new provision: Section 168(n) allows for 100% expensing of certain nonresidential real estate property used in a qualified production activity within the U.S.
This provision significantly accelerates depreciation on property that is otherwise depreciable over 39 years. To be a qualified production property (QPP) for the accelerated deduction, the property must meet several types of criteria.
The excess business loss (EBL) limitation under IRC 461(L) has been extended through December 31, 2028. Beginning with the 2025 tax year, non-corporate taxpayers will continue to be subject to this limitation and must report disallowed losses on Form 461.
For 2025, the threshold amounts are $313,000 for single filers and $626,000 for joint filers.
With respect to oil and gas working interest ownership, the OBBB did not change the Section 469(c)(3) exception, which allows for general partners to claim deductions against any form of income rather than being subject in the passive loss rules.
Enhanced carbon-capture credits (Section 45Q) reward projects that integrate emissions mitigation. The residential Clean Energy Credit (IRC Section 25D) ends as of December 31, 2025, and new construction of Clean Electricity Credits (IRC Sections 45Y and 48E) must begin prior to July 4, 2026, and be placed in service by December 31, 2027.
A shift away from renewable tax credits, as the bill halts new incentives for wind and solar in favor of traditional hydrocarbons.
Lower federal royalty rates on onshore wells, dropping from 16.67% to 12.5%, make federal land drilling more attractive.
These measures reinforce what energy investors have long known: The oil and gas sector is uniquely positioned to combine potential cash returns with robust tax offsets.
The foundation: Intangible drilling costs (IDCs)
One of the most significant tax benefits in oil and gas investing is the deduction of intangible drilling costs (IDCs).
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These are the non-recoverable expenses of drilling — labor, site prep, drilling fluids and other costs that don't result in a tangible asset.
What's deductible: IDCs are non-recoverable costs such as labor, site prep, drilling fluids and other "sunk" expenses. These are generally 100% deductible in the year incurred.
Why it matters: For investors with high current income, these immediate write-offs can shield substantial taxable earnings.
The depletion allowance: Recognizing resource decline
Oil and gas investors can claim deductions for the depletion of natural resources, claiming annually, the greater of:
- Cost depletion. Based on how much of the reserve is produced compared with remaining, in the ground, total estimated reserves.
- Percentage depletion. This is usually 15% of gross income from production (subject to limits), available to working interest owners deemed as independent producers and royalty owners.
What's deductible: Revenue from producing wells can be offset by depletion allowances year after year.
Bonus depreciation and tangible drilling costs
What's deductible: Equipment such as casing, wellheads and rigs — normally depreciated over years — are now eligible for 100% bonus depreciation under the OBBB.
What's not deductible: Not every cost is immediately deductible. For example:
- Lease acquisition costs must usually be capitalized, not expensed
- Geological and geophysical studies often follow different amortization rules
- Personal expenses tied to investments (travel, entertainment) are generally not deductible
Balancing risk and reward
Energy investing is not without risk; commodity prices fluctuate, wells might underperform, and regulatory priorities can shift with administrations.
However, the unique tax treatment of oil and gas can soften the downside by allowing investors to:
- Deduct a large portion of their upfront costs
- Claim ongoing depletion allowances against production income
- Leverage new OBBB incentives for U.S.-focused projects
As we enter the fourth quarter of 2025, investors should note that the opportunity to take advantage of these powerful tax benefits ends on December 31, 2025. Acting before year-end ensures access to deductions, depletion allowances, and the expanded incentives under OBBB.
The bottom line
For investors seeking both portfolio diversification and tax efficiency, oil and gas remains one of the few asset classes in which the tax code provides distinct advantages.
With the OBBB reinforcing these benefits in 2025, now may be a prudent time to review whether energy investments fit into your overall financial strategy.
As always, consult with a tax professional who understands oil and gas specifically. Done right, deductions and depletion can be powerful wealth-building tools. Done wrong, they can become audit triggers.
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