December is when tax questions get real, because there is not much time left to adjust. For qualified oil and gas investors, a quick year-end review can help you understand where key deductions may land and what you still have time to plan before the year closes.
Why do many investors reassess before December closes?
By December, you usually have enough year-to-date information to estimate taxes with more confidence. That is why many investors revisit their tax position now. You can review estimated tax payments, check whether the alternative minimum tax could be relevant, and prepare for what may show up on partnership tax documents.
U.S. crude oil production has remained near record levels. According to the U.S. Energy Information Administration’s Short-Term Energy Outlook, U.S. crude oil production is averaging about 13.6 million barrels per day in 2025, reflecting continued strength in domestic output. When production stays high, project performance, cash flow expectations, and tax planning considerations remain closely connected to real operational activity, making timing and year-end reviews especially important for investors.
Start with your investment structure because it drives tax treatment
Two oil and gas investments can look similar but produce different tax outcomes. A key driver is the type of interest you own. IRS guidance around intangible drilling costs depends on the type of interest an investor holds, which is why it is important to confirm your ownership structure before assuming a deduction will apply.
Intangible drilling costs
Intangible drilling costs, often called IDCs, are certain drilling and development expenses that generally do not have salvage value. The IRS oil and gas audit guide describes IDCs as expenditures for wages, fuel, repairs, hauling, supplies, and other items that are incident to and necessary for drilling wells and preparing wells for production. See the IRS guide here.
When an investment is structured appropriately, certain drilling costs can help reduce taxable income in the first year. A significant portion of an initial investment is often tied to drilling and development expenses, which may be deductible in the year they occur. How this applies depends on the structure of the investment and the investor’s individual tax situation.
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IDC checkpoints to cover with your CPA
- Confirm whether IDC expensing is available to you. The IRS audit guide explains that, to qualify, the taxpayer generally must hold a working or operating interest in the well during the complete payout period.
- Ask how the IDC election is handled. The IRS explains that the choice to deduct drilling costs is made when the deduction is claimed on the tax return for the year those costs occur, and that decision usually carries forward to future years.
- Talk with your tax advisor about AMT. Some investors are subject to the Alternative Minimum Tax, which can limit certain deductions. The IRS allows an option where some drilling costs can be spread out over time instead of being deducted all at once. When this option is used, those costs are generally not counted in the AMT calculation. Whether this makes sense depends on your income and tax situation, which is why your advisor can help run the numbers and compare outcomes.
Depletion allowances and what they can mean for investors
Depletion is a tax concept designed to reflect that oil and gas reserves decline as they are produced. For investors who have a qualifying ownership interest, tax rules allow a deduction that helps account for this gradual reduction, which can lower taxable income over time. The IRS also explains that there are two methods, cost depletion and percentage depletion, and the method that yields the greater deduction is used, subject to limitations.
The IRS explains that percentage depletion for oil and gas is limited under the tax code. In simple terms, only certain investors, such as independent producers and royalty owners, may qualify, and only on a set amount of production each year. There are also caps based on taxable income and on how much oil or gas can be counted for the deduction, sometimes referred to as a barrel limit.
Under current tax rules, a portion of a well’s yearly production, sometimes up to 15 percent, may receive favorable tax treatment. How much applies depends on IRS guidelines and the investor’s individual tax situation, which is why it is best reviewed with a CPA.
A year-end planning checklist you can finish in one sitting
- Build a year-to-date snapshot. Gather income, realized gains, and estimated tax payments, then list expected pass-through items, such as IDC and depletion.
- Ask for preliminary partnership information if available. Final tax forms come later, but a year-end summary can reduce surprises.
- Review estimated tax payment timing. If you pay quarterly estimates, confirm you are on track and ask whether an additional payment makes sense.
- Confirm what is deducted now versus over time. Some drilling costs can be deducted right away, while others may be spread out and recovered gradually. The IRS explains that when certain drilling costs are not deducted upfront and are instead capitalized, they are typically recovered over time through depletion.
What to bring to your year-end tax review
A short meeting is usually enough if you come prepared. Bring your year-to-date income summary, realized capital gains report, records of estimated tax payments, and any partnership updates you have received. Then ask two direct questions: what deductions are most likely to apply this year, and are there any elections or limitations that could change the result. This keeps the conversation practical and avoids last-minute surprises.
How DW Energy supports efficient year-end planning
Year-end planning is easier when communication is consistent. On DW Energy’s Approach page, we explain how partners are supported with a monthly partner report, a secure online portal, and annual tax documents, so you and your CPA can work with clearer information.
Wrapping up the year with a clear tax plan
If you want fewer surprises in filing season, focus on three areas now: IDC treatment, depletion, and your broader tax position. When you review those items before December ends, you give your advisor time to run scenarios, and you give yourself time to make informed decisions.
To learn more about how DW supports qualified and approved oil and gas investors with consistent reporting and annual tax documentation, visit DW Energy’s website or get in touch.
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Sources
“Global Energy Outlook,” U.S. Energy Information Administration, https://www.eia.gov/outlooks/steo/report/global_oil.php
“U.S. crude oil production established a new record in August 2024,” U.S. Energy Information Administration, https://www.eia.gov/todayinenergy/detail.php?id=63824
“Oil and Gas Audit Technique Guide,” Internal Revenue Service, https://www.irs.gov/pub/irs-pdf/p5652.pdf
“Tips on Reporting Natural Resource Income,” Internal Revenue Service, https://www.irs.gov/pub/irs-news/FS-13-06.pdf
“Section 263(c),” Internal Revenue Service, https://www.irs.gov/pub/irs-wd/201825017.pdf
“About Us,” DW Energy Group, https://www.dwenergygroup.com/about-us/
“Why Oil & Gas,” DW Energy Group, https://www.dwenergygroup.com/why-oil-gas/
“DW’s Approach,” DW Energy Group, https://www.dwenergygroup.com/dw-approach/