Passive Loss Limitations

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Passive Loss Limitations

Introduction

Prior to 1986, much investment was done by passive investors. It was common for syndicates of investors to pool their resources in order to invest in many alternatives. They would then hire management companies to run the operation. TRA 86 reduced the value of these investments by limiting the extent to which losses associated with them could be deducted from the investor's gross income. This, in turn, encouraged the holders of loss-generating properties to try and unload them, which contributed further to the problem of sinking values. This turmoil and repositioning in markets was caused not by changes in market conditions.

Mortgages and similar real property loans constituted a significant portion of Saving & Loans asset portfolios. Significant declines in the market value of real properties resulted in the erosion of the value of these institutions' major assets.

The savings and loan crisis of the 1980s and 1990s (commonly dubbed the S&L crisis) was the failure of about 747 out of the 3,234 savings and loan associations in the United States.

Some economists consider the net long-term effect of eliminating tax shelters and other distortions to be positive for the economy, by redirecting money to the most inherently profitable investments.

Discussion

Congressional Incentives Encourage Domestic Petroleum Development

Oil and Natural gas from domestic reserves helps to make our country more energy self-sufficient by reducing our dependence on foreign imports. In light of this, Congress has provided tax incentives to stimulate domestic natural gas and oil production financed by private sources. Drilling projects offer many tax advantages and these benefits greatly enhance the economics. These incentives are not "Loop Holes" -- they were placed in the Tax Code by Congress to make participation in oil and gas ventures one of the best tax advantaged investments.

 

Intangible Drilling Cost Tax Deduction

The intangible expenditures of drilling (labor, chemicals, mud, grease, etc.) are usually about (65 to 80%) of the cost of a well. These expenditures are considered "Intangible Drilling Cost (IDC)", which is 100% deductible during the first year. For example, a $100,000 investment would yield up to $75,000 in tax deductions during the first year of the venture. These deductions are available in the year the money was invested, even if the well does not start drilling until March 31 of the year following the contribution of capital.

 

Tangible Drilling Cost Tax Deduction

The total amount of the investment allocated to the equipment “Tangible Drilling ...