Clients arrive with a pitch in hand
They usually hear about the deductions long before anyone explains the limits.
What direct working-interest ownership involves, where it can fit in a client's plan, and the diligence materials Summit provides to advisers.
High-earning clients, business owners and property sellers are often pitched oil and gas before they ask you about it. Whether you advise on the holding itself or only on its tax effect, they will look to you for a clear answer.
They usually hear about the deductions long before anyone explains the limits.
Clients rely on you to separate sound structures from marketing, even when you are not advising on the holding itself.
Drilling deductions, depletion and the working-interest rule rarely come up in everyday practice.
Without a standard disclosure format, you need the right questions and the right documents.
Pick the one that describes you. Each has different responsibilities, constraints and information needs.
Most CPAs are asked a narrow question: what would this actually do to my client's taxes? Answering it well depends on the client's income type, the project's cost split, the timing of funding and the limits that apply at their income.
A useful answer often starts by lowering expectations. Deductions interact with the excess business loss limit, the AMT, recapture and state rules, and the result can differ sharply from the headline.
As a fiduciary, your question is broader: does an illiquid, operationally risky holding fit this client's goals, liquidity needs and existing concentrations, and is the sponsor worth the client's trust?
Direct working interests are generally held outside a client's custodial account, which affects how you track, report and account for them alongside the rest of the portfolio.
If you work within a broker-dealer or bank, your firm's policies on outside activities and private transactions, including FINRA Rules 3270 and 3280, apply before any client conversation about a specific offering.
Educational material is a different matter. Understanding how direct ownership works lets you answer client questions accurately and route them appropriately.
Assign each part of a client's balance sheet a purpose, then judge each asset only against that purpose. It keeps oil and gas in proportion. Select a layer to see what it does and what it gives up.
Layer widths are illustrative, not a recommended allocation. The right mix depends on your circumstances and should be set with your own advisers.
The money that has to be there no matter what happens in markets.
Clients may describe very different things as "owning oil and gas." Knowing which one an offer really is tells you most of what you need about costs, liquidity, liability and tax treatment.
| Attribute | Public energy stocks & fundsExchange-traded | Mineral & royalty interestsShare of revenue | Limited partnership programsPooled, sponsor-managed | Direct working interestHow Summit JVs are structured |
|---|---|---|---|---|
| What you hold | Shares in a company or fund that owns energy assets | A right to a share of production revenue, free of drilling and operating costs | Units in a partnership that holds interests on your behalf | A direct share of specific wells, their costs and their revenue |
| Your share of costs | None directly | None | Borne inside the program | Proportional to your interest, including overruns |
| Liquidity | Daily, on an exchange | Limited; usually a private sale | Limited; often none until the program winds down | Limited; generally held for several years |
| Tax attributes that reach you | Dividends and capital gains | Depletion on royalty income | Drilling deductions and depletion, generally usable only against similar income | Drilling deductions, depreciation and depletion, subject to the limits in Chapter 4 |
| Can deductions offset other active income? | No | Not applicable | Generally no | Potentially, under the working-interest rule |
| Liability | Limited to what you put in | Limited | Limited for limited partners | Not limited in the same way; this is the tradeoff that enables the tax treatment |
| Your role | None | None | Limited partner with few decisions | JV member with governance rights and participation in material decisions |
| Eligibility | Open to anyone | Varies | Often limited to accredited individuals | Accredited individuals, verified before any commitment |
General characteristics only. Individual programs and offerings vary, and specific terms are set out in each offering's documents.
The ownership share that carries the right to develop and produce a property, and the obligation to pay a proportional share of the costs of doing so. Working-interest owners receive their share of revenue after royalties are paid, and they bear their share of the expenses and the outcomes.
A share of production revenue, usually retained by the mineral owner, that is paid before costs and carries no obligation to fund drilling or operations. Simpler and lower in cost exposure, but royalty owners have no say in development and do not receive drilling-related deductions.
The four rules clients ask about, followed by the limits that most often change the outcome. Each is worth modeling against a client's actual figures rather than a sponsor's illustration.
Labor, fuel and drilling services can be deducted in the year they are incurred. On a new well, they are typically a large share of the cost.
Casing, wellheads and tanks are capitalized and depreciated over time. Accelerated depreciation may apply.
Once a well produces, qualifying owners may deduct 15% of gross income from the property each year.
Working interests held without limited liability are exempt from the usual loss limits, so deductions may offset active income such as salary or business income.
These are the rules most often left out of oil and gas marketing, and the ones that most often separate a client's actual result from the headline.
Section 461(l) caps net business losses against non-business income, including wages. The excess carries forward.
IDCs can be a preference item under Section 57, with relief for independent producers.
Section 1254 recaptures prior IDC and depletion deductions as ordinary income on sale.
Working-interest income held without limited liability can be subject to self-employment tax.
Not every state follows the federal treatment of IDCs, depletion or bonus depreciation.
Working-interest income is not excluded from UBTI, and deductions are largely wasted inside an IRA.
Summit focuses on redeveloping proven fields, which can combine new drilling, work on existing wells and acquisitions of producing assets. Select a project type to see which attributes typically matter most. This is a qualitative guide, not a projection.
Most spending on a new well is drilling-related.
Casing, wellheads and surface equipment are capitalized.
Begins only after the well produces.
Revenue waits for drilling and completion.
A single Summit project may combine all three. For any specific project, ask for the expected split of costs between drilling, equipment and acquisition, and have your CPA apply it to your own situation.
Direct ownership means sharing in the operational risk of a real business. These are the considerations to walk through with any client, and to record in your diligence file.
A well can perform as planned and still earn less if prices fall.
Reserve estimates are engineering judgments, not certainties.
Owners pay their share of costs, including overruns and repairs.
There is no public market. Plan for capital to stay committed for years.
The tax treatment depends on liability not being limited. Clients should review it with their attorney.
Deductions can be limited, recaptured or changed by new legislation.
One project or operator concentrates a client's exposure. Sponsor quality matters.
Evolving regulation can affect costs and timelines.
Short, direct answers for CPAs, RIAs and wealth managers. Where the answer depends on your situation, we say so.
This website is provided by Summit Ventures for general informational and educational purposes only. It does not constitute an offer to sell, or a solicitation of an offer to buy, any security or interest, and no such offer or solicitation will be made except through definitive offering documents provided directly to verified accredited participants.
Participation in a Summit Ventures joint venture is limited to individuals and entities that qualify as accredited under Rule 501 of Regulation D, and Summit Ventures takes reasonable steps to verify that status before any commitment is finalized, consistent with Rule 506(c) of Regulation D.
Direct working-interest participation in oil and gas development involves risk, including commodity price volatility, operational and geological risk, illiquidity, and the potential loss of some or all committed capital. Past performance of any Summit Ventures program, and the experiences described by any individual participant, are not indicative of future results and should not be viewed as typical or guaranteed.
Tax information referenced on this website is general in nature and reflects tax law believed current as of publication. It has not been prepared for any specific individual or transaction and is not a substitute for advice from independent, qualified tax and legal counsel.
Statements from program participants reflect their individual experience and are not paid testimonials unless otherwise disclosed. Individual results vary, and no statement here should be construed as a projection or promise of similar outcomes.