What does this mean to investors? Besides annoyingly high winter heating bills and elevated gasoline pump prices, the recent sharp increases in energy prices – natural gas spots in particular – provide a unique investment opportunity. Our government provides incentives to promote the development of domestic energy sources with the objective of reducing our dependence on foreign markets. This situation can present a remarkable investment opportunity.
Natural Gas Investment Programs can provide a means to mitigate current year taxes and create a long term taxed advantaged income stream. Below is an example of one Natural Gas Investment Program.
Investment = $ 10,000
Tax deduction in year of investment = 90 % of investment . . . $ 9,000
IRS tax code - Intangible Drilling Costs (IDC)
Assume your tax rate is 27% Fed & 6 % state, total33%, your tax savings is:
33% x $ 9,000 = $ 3,000. Your net investment is thus $ 10,000 - $ 3,000 = $7,000.
Cash flow generally commences within six to nine months of investment. This period is the time to drill, connect, collect, transport, and receive payment for gas delivered. Rate of distribution will vary with natural gas supply and demand. Cash flow will continue for as long as gas wells can economically produce natural gas. In the past, this has been typically 15 to 30 years. Wells in the future may have shorter or longer run times.
The cash flows are also partially sheltered(~ 20%).
IRS tax code - Depletion Allowance (tax code is always subject to changes)
Typical programs over the past 3-5 years where natural gas prices are in the $ 6.50 per unit (1000 BTUs) have produced tax deductions and cash on cash returns to recoup the initial investment in approximately 4-5 years (past results are not necessarily indicative of future returns). The income however may continue for 15-25 years more, generally at a rate less than the early years of production. If, as the Department of Energy proclaims, 900 of the next 1000 US power plants will use natural gas, if we see continued destructive hurricane seasons off the Florida Coast & in the Mexican gulf, if we experience continued brutal winters in the northeastern part of the US, and if (as projected by the EIA) natural gas prices remain elevated, then one might consider a natural gas investment program to round out one’s investment portfolio.
Craig D. Emerson, an associate at Berkshire Advisor Resource, Inc., has over 10 years of experience in the Financial Services Industry. He specializes in retirement, investment, and wealth transfer planning for business owners and their key executives. Mr. Emerson can be reached at (303) 221-2100 x233 or cemerson@berkadvisor.com.
Based in Greenwood Village, Colorado, Berkshire Advisor Resource, Inc. is a recognized expert in tax / wealth preservation planning, retirement planning, insurance planning, and estate / wealth transfer planning. B.A.R., Inc.’s corporate philosophy is to partner with the legal and tax advisors of our clients to provide a comprehensive financial plan. Securities and investment advisory services offered through H. Beck, Inc. Member FINRA, SIPC. 11140 Rockville Pike 4th Floor, Rockville, MD 20852. H. Beck, Inc and B.A.R., Inc. are unaffiliated entities.