There is all sorts of hype about the price of oil at the moment, but with so many tax breaks available few would disagree that it’s still one of the most lucrative fields to invest in. Furthermore, this is something that is unlikely to change anytime soon, the rewards are just too great.
Of course, investing is oil is a little more complex than other industries. It’s one of the reasons why individuals such as Brian Hudnall have built a business on consulting investors; for the average person oil is an absolute minefield which requires at least some direction from established professionals.
However, for those who just want to take a brief look at how to invest in this industry, here are the main ways that are usually recommended.
Let’s start with one of the methods which many deem as the riskiest. In fact, if someone is just starting out with oil investment and hasn’t got any consultant on-board, it’s probably a method that’s not recommended. Instead, it’s reserved for the experienced.
In simple, working interests mean that you have great involvement in the investment. Anyone who participates has unlimited liability, while any income will be reported via the 1040.
Next on the list is a partnership. These don’t bring on quite as much risk as the previous method, although they are still quite a complex form of oil investment. The most popular type of partnership at the moment comes in the form of a limited partnership, meaning that the investor has the added protection of limiting their liability to the amount of their investment.
Generally, a partnership will be purchased as a security. Tax incentives are available and like most partnerships, all of the revenue and expenses will be sent through via a Form K-1.
At the other end of the scale, at least in terms of risk, we have mutual funds. While one might immediately think that this is one of the most popular methods for investors, the fact that mutual funds aren’t open to all of the tax relief that many other forms of oil investment have means that they are not always an immediate choice.
The above means that both dividends and capital gains tax will have to be paid, which can be off-putting as it can add affect the bottom line significantly.
We’ll end our roundup with royalties, which might not necessarily be open to everyone.
In short, royalties are paid to any individual who owns land that an oil well is based on. While an investor could opt to purchase such land and take advantage of this form of investment, suffice to say there is a limited supply around.
Those that do benefit from royalties usually do so up to 20% of the gross revenue of the well. While tax benefits don’t exist, this is another form of investment in which there are no liabilities for landowners which can obviously make a substantial difference.