For CPAs, RIAs & Wealth Advisors

WHAT CPAs AND FINANCIAL ADVISORS NEED TO KNOW ABOUT WORKING INTERESTS

A technical peer-to-peer brief on IRC § 263(c), the § 469(c)(3) exception, and Rev. Rul. 68-331.

Chapter 1
Situation

Core planning realities

A structured examination of current market and tax conditions.

StructureHolding Structure RulesDirect ownership or non-liability-limiting entities are required for active tax status.
Depreciation100% Bonus Depreciation2025 tax legislation permanently reinstated full first-year tangible expensing.
Timing§ 461(h) 90-Day RulePrepaid drilling costs must satisfy economic performance within 90 days.
ReportingSchedule K-1 QualityAudit-ready K-1 detail is required for client tax filing compliance.

Profile

Planning profiles

Evaluating structural options across participant profiles.

Tax & Wealth Advisory Practice

CPAs, RIAs, M&A Advisors & QIs

Evaluating client facts involving high ordinary income surges, business exits, or tight 1031 clocks.

Questions for Summit

  • Can you provide a sample K-1 reporting package and operator AFE breakdown?
Chapter 2
Capital roles

Structuring capital for long-term resiliency

Balancing liquid reserves against tax-aware direct ownership.

Client Reserve Capital

Short-term liquidity

Capital required for client overhead and emergency liquidity.

  • Its job Capital protection.
  • What it gives up Tax efficiency.
  • Worth asking What is the client's liquidity horizon?

Direct Working Interest

Joint venture participation

Direct property participation providing active ordinary income write-offs.

  • Its job Offset active W-2/1099 income and generate depletable cash flow.
  • What it gives up Public market liquidity.
  • Worth asking Is the client's legal entity structured properly?

Layer proportions are illustrative, not investment advice.

Chapter 3
Ownership

Evaluating structural models

Comparing direct working interests against alternative structures.

AttributePooled Energy FundsLimited PartnershipDirect Working InterestSummit Joint Venture
Active Income OffsetBlocked (Passive loss rules apply)Valid under IRC § 469(c)(3) exception
1031 Exchange EligibleIneligible (Rev. Rul. 78-135)Eligible under Rev. Rul. 68-331
  • IRC § 469(c)(3) The working interest exception excluding direct oil & gas interests from passive loss rules without an hours test.
  • Percentage Depletion (§ 613A) A 15% statutory tax-free gross revenue allowance continuing after cost basis reaches zero.
Chapter 4
Tax mechanics

Statutory layers of IRC § 263(c)

Understanding the statutory provisions governing active tax deductions.

§ 263(c)Deduction TimingGoverns Year-1 expensing of intangible drilling costs.
§ 469(c)(3)Active Loss OffsetEnables active W-2 wage offset when held without liability limitation.
§ 57(a)(2)AMT Preference ItemCaps AMTI reduction at approximately 60% of pre-deduction income.
§ 465At-Risk BasisLimits deductible loss to cash plus personal recourse obligations.

Technical breakdown for advisory modeling.

Development Wells

Intangible drilling costs360% - 85% of total costExpensed in Year 1 under § 263(c) election.

Tax limits

Statutory limits to model

Always consult your CPA to model these thresholds against your full return.

  • AMT Preference Cap Independent producer relief caps AMTI reduction benefit at 40% of AMTI.
  • Entity Selection Danger Holding via an LLC or LP membership interest converts the asset to passive status.
Chapter 5
Considerations

Operational risks and member obligations

Understanding the responsibilities of direct joint venture participation.

  • Advisor Alignment Must coordinate client CPA, RIA, and legal counsel before capital contribution.
  • Audit-Ready Records Requires operator AFE breakdowns and clear Schedule K-1 box reporting.
Educational Library

Resources for Accredited Investors

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Webinars

All sessions
On demand

Own the Production, Not the Paper

How direct working-interest ownership works, the four pillars of project evaluation, and the questions to ask before considering an opportunity.

Mark Elliott & Jarrod ErwinView session

Insights

Why does holding structure dictate active vs passive status under § 469?

Section 469(c)(3)(A) grants active status only if the taxpayer holds the interest directly or through an entity that does not limit personal liability. An LLC or LP structure converts the deduction to passive.