How do I recover the cost of drilling a test hole?

You recover your cost through depreciation. You also must capitalize your cost for drilling a test hole. If the test hole produces no water and you continue drilling, the cost of the test hole is added to the cost of the producing well. You can recover the total cost through depreciation deductions.

Are oil and gas drilling costs deductible?

Such expenditures in any other business would ordinarily be considered capital costs. But as much as 80% of the costs of drilling an oil and gas well, while being capital in nature, are all deductible in the year incurred. Generally, eligible intangible drilling costs are the costs of drilling that have no salvage value.

Is drilling a water well a capital expense?

Water well. You can't deduct the cost of drilling a water well for irrigation and other agricultural purposes as a soil and water conservation expense. It is a capital expense. You recover your cost through depreciation. You also must capitalize your cost for drilling a test hole.

How does equipment depreciation work?

Some methods depreciate equipment gradually whereas others provide an accelerated rate of depreciation. The typical way to calculate equipment depreciation for federal tax purposes is using the MACRS method, a system that allows businesses to distribute an asset’s depreciation expense across its useful life.

Can a well be deducted from depreciation?

You can recover the total cost through depreciation deductions. If a test hole, dry hole, or dried-up well (resulting from prolonged lack of rain, for instance) is abandoned, you can deduct your unrecovered cost in the year of abandonment. Abandonment means that all economic benefits from the well are terminated.

What is heavy equipment depreciation?

Depreciation is the gradual reduction in an asset’s value over time due to wear and tear, obsolescence, and usage. In financial terms, it's a method of spreading the cost of a purchase over the time it’s used in your business.