What is Alternative Minimum Tax (AMT)

In general, Alternative Minimum Tax (AMT) is a separate tax system that parallels the regular individual income tax system. It generates an alternative tax liability by applying different tax rates to a broader base of income than under the regular individual income tax system and limits the use of certain tax credits available under the regular income tax. It was designed to close certain loopholes in the income tax law to ensure that all wealthy taxpayers pay at least some income tax. The AMT is computed by adding tax preference items such as tax shelter deductions to adjusted gross income, then subtracting accordingly due to filing status. This tax is different from the minimum tax, which usually sets a base level for taxation of corporations.

History and Future of Alternative Minimum Tax (AMT)

In 1970, the United States Government instituted the Alternative Minimum Tax (AMT) to make sure high income tax bracket earners paid a minimum tax bill. In the beginning, AMT affected a small percentage of taxpayers – now AMT affects a much larger base of taxpayers. Under current law, AMT coverage will skyrocket. According to research by U.S. Department of Treasure, by 2010, the AMT will affect 17 million taxpayers—about one-fifth—up from 1.3 million in 2000 – and the additional tax liability generated by AMT is projected to grow from $5.8 billion to $38.2 billion during the same period. Of the projected 17 million taxpayers affected by AMT in 2010, about 4.5 million are expected to have reduced tax credits due to AMT, even though they are not projected to have a direct AMT liability. This would make the AMT almost as common as the mortgage interest deduction is today.

Who the Alternative Minimum Tax (AMT) Affects and How

The Alternative Minimum Tax (AMT) usually applies to households in the $100,000 to $500,000 tax bracket. In the near future, the AMT will be the de facto tax system for these households, 93 percent of whom will face the tax. It will encroach dramatically on the middle class, affecting 37 percent of households with income between $50,000 and $75,000 and 73 percent of households with income between $75,000 and $100,000 (compared to less than 3 percent for each group in 2002). Other factors that affect AMT status are various exemptions, deductions and credits, mortgage interest, stock options, long-term capital gains and property taxes. AMT doesn’t fluctuate with inflation, thus, as local and state taxes continue to rise, more and more taxpayers will be affected by AMT. AMT may affect taxpayer’s liability in two ways: (1) directly, by imposing an AMT liability that exceeds their regular tax liability, or (2) indirectly, by reducing the amount of tax credits allowable under the regular income tax.

Advantages of Oil & Gas Investments
Intangible Drilling Cost (IDC)

Investing in Oil & Gas programs can reduce the Alternative Minimum Tax (AMT) owed by taxpayers. There is a provision in the Tax Code that allows the major costs of drilling oil and gas wells to be deducted in the year there were incurred. This deduction is known as the Intangible Drilling Cost (IDC). Under these special rules, an operator (i.e., a person who holds a working or operating interest in any tract or parcel of land either as a fee owner or under a lease or any other form of contract granting working or operating rights) who pays or incurs IDCs in the development of an oil or gas property located in the United States may elect either to expense or capitalize those costs. The uniform capitalization rules do not apply to otherwise deductible IDCs. These costs typically included expenditures for wages, fuel, repairs, hauling, supplies and other costs that are essential and necessary for drilling and preparing a well for producing oil or gas. Intangible drilling costs are a major portion of the costs necessary to locate and develop oil and gas reserves. Since the benefits obtained from these expenditures are of value throughout the life of the project, these costs would be capitalized and recovered over the period of production under generally applicable accounting principles. The acceleration of the deduction for IDCs is viewed as a tax incentive. An investor can receive an income tax deduction equal to 90% of the capital contributions on the venture. If the investor chooses the AMT, IDC deductions can reduce the investor’s AMT by up to 40%. If you are self-employed, you may use your share of the oil and gas venture’s deduction for intangible drilling costs to offset part of your net earnings from self-employment in the year you invest as an investor or venturer. For further explanation please go to this link;
http://www.irs.gov/pub/irs-pdf/p535.pdf

Percentage Depletion and Depreciation

As oil and gas reserves recoverable from a well are reduced in quantity, or depleted, the investor can take a depletion allowance against gross well income received by the investor from the first oil production of the well. The depletion deduction is generally 15%, but can range up to 25% for marginal producing wells, depending on the price of oil the previous year. In an oil and gas venture, the cost of most tangible assets, like equipment in the wells placed in service, is recoverable through depreciation over a seven-year cost recovery period, using the 200% declining balance method, then switching to straight-line to maximize the deduction.

Overview

Our objective is to provide economic benefits and tax deductions to our investors. Our programs are structured as a private joint venture, which for federal tax purposes is not treated as a taxable entity, thus, allowing high-income wage earners the ability to reduce their tax liability and receive economic benefits. Actual use and application of tax benefits of any investment depend largely on an individual’s particular income tax position in the year in which he/she invests, and tax benefits may vary between investors accordingly.
There are certain risks associated with drilling oil and gas wells. Oil and gas programs, joint ventures, are speculative in nature and are not suitable for all investors. These joint ventures also pay fees to our company, as the Managing Venturer.