After several years earning a healthy six-figure income I was an Accredited Investor and looking for opportunities to diversify out of the stock market and supplement my real estate cashflow. One of the areas I researched was energy, specifically oil and gas. Now as someone who loves the environment, got my church to begin recycling when I was eleven years ago, drove a Prius for several years and put solar panels on our roof, this might seem like a strange choice. However, the fact remains that the country needs oil and gas resources at this point in our history until we have enough renewable options. In 2019 the United States was “energy independent” (produced more energy than it used) for the first time since 1957. However the U.S. still consumes nearly 20% of all oil produced. This country needs energy and the demand will persist for many years to come. How can you take advantage of it? Should you?

I chose to invest in the space over 6 years ago due to the tax benefits, diversification and additional income stream. Anyone familiar with Next-Level Income knows that I’m always looking for ways to add passive income to my portfolio. I love real estate because it also has fantastic tax advantages. The U.S. government supports energy production with numerous benefits that are unique to the space. If you are a high-income W2 earner, you should take some time to explore this area as well. Unlike real estate where the benefits are confined to the investment (still great!) with oil & gas, the IRS says that even W2 earners can take advantage of the tax deductions. That’s right, a W2 earner can take advantage of the the depreciation benefits in this space! (Of course, I’m not a CPA and an investor should always perform due diligence not only on an investment, but also consult your personal advisors regarding your unique situation.)

In 2017, the Tax Cuts and Jobs Act substantially enhanced the tax benefits and up to 100% of certain costs can be deducted in the first year. “Intangible” costs can account for upwards of 85% of the total cost of drilling a well. Being able to use this to offset other forms of income such as W2 income, interest and capital gains can be a powerful tax strategy. “Tangible” costs, instead of being spread over 7 years can now be deducted 100% in the first year as well. These accelerated benefits will sunset in 2022. So there are substantial tax benefits, but I never choose an investment just because it’s a good tax benefit.

Successful oil & gas wells produce cashflow as well. Like real estate, these wells produce an income stream today and can potentially be sold in the future as production improves. Aside from the tax benefits, you need to decide how you may like to participate in the space. The previously discussed benefits are available for Direct Participation, however (like real estate) you can also invest in the energy sector by buying stock in oil & gas companies or even investing in things like the pipelines where energy is transported. For me, I liked the cashflow and tax benefits of Direct Participation.

Compared to when I invested, today is even a better time to invest, in my opinion. With oil prices at relatively low levels and operators being forced to sell, investors with dry powder can take advantage and “buy low” in anticipation of selling when prices rise again. I’ll be sharing a special podcast episode in the near future. If you’d like to learn more you can also download a whitepaper to learn more here.