Connect with us

Accounting

3 oil and gas investments that bring big tax savings

Published

on

Oil and gas investments tapping into tax advantages for drilling costs, qualified opportunity zones and 1031 exchanges could bring valuable returns with fewer payments to Uncle Sam.

Financial advisors working with high net worth investors or other clients seeking diversification with tax savings should consider alternative investments in oil and gas, according to Matthew Iak, executive vice president of the U.S. Energy Development Corporation, which invests in, operates and drills wells. While renewable energy gets its own tax advantages, some tailwinds are gusting behind oil and gas assets based on the higher likelihood that incoming President Donald Trump and the Republican-led Congress will extend policies such as the opportunity zones and expand the record production and growth started under President Joe Biden.

For high net worth and other accredited investors, the oil and gas assets represent “a really great financial planning tool” and a change in recent years in an energy industry in which “the tax tail used to wag the investment dog,” Iak said in an interview.

“Energy has designed itself very well to take advantage of these tax arbitrages,” Iak said. “It used to be a very tax-driven industry that wasn’t always as economically driven, and I think that paradigm has shifted as a whole in the last five to seven years.”

READ MORE: The best- and worst-performing energy ETFs of the decade

The asset class remains a volatile one subject to an array of macroeconomic and geopolitical factors that are delivering “more uncertainty in energy markets heading into a new year than any year since the pandemic,” according to an outlook report for 2025 by S&P Global Commodity Insights. Wars in Ukraine and the Middle East, U.S.-China tensions, electricity demand for artificial intelligence and possible tariffs or pullouts from international climate agreements add up to just a few of them. Political pushback against ESG and bad actors’ frequent use of schemes tied to energy investing bring further potential risks or rewards.

“There are emerging technological and fundamental trends that will clearly have an impact on markets over the coming year, although how significant their impact will be is uncertain,” S&P Global Commodity Co-President Dave Ernsberger said in a statement.

Still, the prospects for energy investments in general for 2025 look “bright,” according to a December note by Fidelity Investments portfolio managers Maurice FitzMaurice and Kristen Dougherty. Other elements of the equation are weighing more heavily than the outcome of the election, which “should not have a significant impact on oil markets,” they wrote.

“The price of crude oil is likely to remain elevated in 2025 due to rising global demand, constrained global supply and elevated geopolitical risk,” their outlook report’s key takeaways read. “More energy producers are likely to boost crude-oil production in an environment of higher prices. Elevated crude-oil prices make it easier for many energy companies to generate higher profits, especially energy producers and energy equipment and services companies.”

Against that larger backdrop, Iak focused on three possible forms of private investments that are different from a publicly traded energy company’s stock or a sector-focused ETF.

READ MORE: Goldman Sachs on what 2025 might bring for markets

Drilling deductions

The first revolves around Section 263(c) of the Tax Code, which enables the deduction of intangible drilling costs for new oil and gas wells and future depreciation expenses on the equipment at the facilities. Investing in a new oil well could help advisors and their clients reduce their annual income for tax-bracket purposes while opening opportunities for strategies such as a Roth conversion or savings on a required minimum distribution from an individual retirement account and qualifying for greater deductions on the profits of pass-through entities.

“You’re able to write the dollar off, and most of it in the calendar year that you invest,” Iak said. “In financial planning, if you like the underlying investment, most importantly, and you can pair that with tax planning, it becomes a really amazing tool. You can net a lot of money when you do this right. …  It becomes a key to accomplish something in financial planning.”

Opportunity zones

Oil and gas or renewable energy investments in economically distressed areas designated as “qualified opportunity zones” under the Tax Cuts and Jobs Act come with further tax advantages. Deferral of taxes on capital gains and duty-free growth after a decade tack on additional savings on top of the underlying returns. That’s why Iak refers to opportunity zones as “a mega-Roth for capital gains” and, although he admits he is “very biased” in saying so, why he believes they are “the single greatest tax code ever written,” he said.

With lawmakers expected to enshrine opportunity zones past their current expiration in 2027 as part of this year’s tax debate, rural areas such as some parts of the famed Permian Basin in Texas could garner an influx of investments, Iak added.

“Most of the benefits will be after 10 years, but that’s the design. You want that money to keep growing and growing and growing,” he said. “I think they’re going to grow immensely when they re-up this, especially with some of the potential rules that they’re putting in there.”

READ MORE: All about alts: The cases for (and against) private investments

1031 exchanges

The tax efficiency of other investments that traditionally seem devoted to different parts of a portfolio apply to some energy plays, too.

While 1031 exchanges usually relate to real estate investments in which an owner who sells one property and uses the proceeds to buy a similar “like-kind” asset can defer the taxes on their capital gains, they work for certain energy holdings as well. Some energy investments meet the strict requirements for so-called real property that would be eligible for a 1031 exchange — even if the original asset is an apartment building. Of course, careful legal counsel about the right structure for the transaction will ensure the highest possible savings.

“It tends to work extremely well for mineral rights,” Iak said. “It works just like any other 1031 exchange, and most people aren’t even aware of it.”

Continue Reading

Accounting

IAASB tweaks standards on working with outside experts

Published

on

The International Auditing and Assurance Standards Board is proposing to tailor some of its standards to align with recent additions to the International Ethics Standards Board for Accountants’ International Code of Ethics for Professional Accountants when it comes to using the work of an external expert.

The proposed narrow-scope amendments involve minor changes to several IAASB standards:

  • ISA 620, Using the Work of an Auditor’s Expert;
  • ISRE 2400 (Revised), Engagements to Review Historical Financial Statements;
  • ISAE 3000 (Revised), Assurance Engagements Other than Audits or Reviews of Historical Financial Information;
  • ISRS 4400 (Revised), Agreed-upon Procedures Engagements.

The IAASB is asking for comments via a digital response template that can be found on the IAASB website by July 24, 2025.

In December 2023, the IESBA approved an exposure draft for proposed revisions to the IESBA’s Code of Ethics related to using the work of an external expert. The proposals included three new sections to the Code of Ethics, including provisions for professional accountants in public practice; professional accountants in business and sustainability assurance practitioners. The IESBA approved the provisions on using the work of an external expert at its December 2024 meeting, establishing an ethical framework to guide accountants and sustainability assurance practitioners in evaluating whether an external expert has the necessary competence, capabilities and objectivity to use their work, as well as provisions on applying the Ethics Code’s conceptual framework when using the work of an outside expert.  

Continue Reading

Accounting

Tariffs will hit low-income Americans harder than richest, report says

Published

on

President Donald Trump’s tariffs would effectively cause a tax increase for low-income families that is more than three times higher than what wealthier Americans would pay, according to an analysis from the Institute on Taxation and Economic Policy.

The report from the progressive think tank outlined the outcomes for Americans of all backgrounds if the tariffs currently in effect remain in place next year. Those making $28,600 or less would have to spend 6.2% more of their income due to higher prices, while the richest Americans with income of at least $914,900 are expected to spend 1.7% more. Middle-income families making between $55,100 and $94,100 would pay 5% more of their earnings. 

Trump has imposed the steepest U.S. duties in more than a century, including a 145% tariff on many products from China, a 25% rate on most imports from Canada and Mexico, duties on some sectors such as steel and aluminum and a baseline 10% tariff on the rest of the country’s trading partners. He suspended higher, customized tariffs on most countries for 90 days.

Economists have warned that costs from tariff increases would ultimately be passed on to U.S. consumers. And while prices will rise for everyone, lower-income families are expected to lose a larger portion of their budgets because they tend to spend more of their earnings on goods, including food and other necessities, compared to wealthier individuals.

Food prices could rise by 2.6% in the short run due to tariffs, according to an estimate from the Yale Budget Lab. Among all goods impacted, consumers are expected to face the steepest price hikes for clothing at 64%, the report showed. 

The Yale Budget Lab projected that the tariffs would result in a loss of $4,700 a year on average for American households.

Continue Reading

Accounting

At Schellman, AI reshapes a firm’s staffing needs

Published

on

Artificial intelligence is just getting started in the accounting world, but it is already helping firms like technology specialist Schellman do more things with fewer people, allowing the firm to scale back hiring and reduce headcount in certain areas through natural attrition. 

Schellman CEO Avani Desai said there have definitely been some shifts in headcount at the Top 100 Firm, though she stressed it was nothing dramatic, as it mostly reflects natural attrition combined with being more selective with hiring. She said the firm has already made an internal decision to not reduce headcount in force, as that just indicates they didn’t hire properly the first time. 

“It hasn’t been about reducing roles but evolving how we do work, so there wasn’t one specific date where we ‘started’ the reduction. It’s been more case by case. We’ve held back on refilling certain roles when we saw opportunities to streamline, especially with the use of new technologies like AI,” she said. 

One area where the firm has found such opportunities has been in the testing of certain cybersecurity controls, particularly within the SOC framework. The firm examined all the controls it tests on the service side and asked which ones require human judgment or deep expertise. The answer was a lot of them. But for the ones that don’t, AI algorithms have been able to significantly lighten the load. 

“[If] we don’t refill a role, it’s because the need actually has changed, or the process has improved so significantly [that] the workload is lighter or shared across the smarter system. So that’s what’s happening,” said Desai. 

Outside of client services like SOC control testing and reporting, the firm has found efficiencies in administrative functions as well as certain internal operational processes. On the latter point, Desai noted that Schellman’s engineers, including the chief information officer, have been using AI to help develop code, which means they’re not relying as much on outside expertise on the internal service delivery side of things. There are still people in the development process, but their roles are changing: They’re writing less code, and doing more reviewing of code before it gets pushed into production, saving time and creating efficiencies. 

“The best way for me to say this is, to us, this has been intentional. We paused hiring in a few areas where we saw overlaps, where technology was really working,” said Desai.

However, even in an age awash with AI, Schellman acknowledges there are certain jobs that need a human, at least for now. For example, the firm does assessments for the FedRAMP program, which is needed for cloud service providers to contract with certain government agencies. These assessments, even in the most stable of times, can be long and complex engagements, to say nothing of the less predictable nature of the current government. As such, it does not make as much sense to reduce human staff in this area. 

“The way it is right now for us to do FedRAMP engagements, it’s a very manual process. There’s a lot of back and forth between us and a third party, the government, and we don’t see a lot of overall application or technology help… We’re in the federal space and you can imagine, [with] what’s going on right now, there’s a big changing market condition for clients and their pricing pressure,” said Desai. 

As Schellman reduces staff levels in some places, it is increasing them in others. Desai said the firm is actively hiring in certain areas. In particular, it’s adding staff in technical cybersecurity (e.g., penetration testers), the aforementioned FedRAMP engagements, AI assessment (in line with recently becoming an ISO 42001 certification body) and in some client-facing roles like marketing and sales. 

“So, to me, this isn’t about doing more with less … It’s about doing more of the right things with the right people,” said Desai. 

While these moves have resulted in savings, she said that was never really the point, so whatever the firm has saved from staffing efficiencies it has reinvested in its tech stack to build its service line further. When asked for an example, she said the firm would like to focus more on penetration testing by building a SaaS tool for it. While Schellman has a proof of concept developed, she noted it would take a lot of money and time to deploy a full solution — both of which the firm now has more of because of its efficiency moves. 

“What is the ‘why’ behind these decisions? The ‘why’ for us isn’t what I think you traditionally see, which is ‘We need to get profitability high. We need to have less people do more things.’ That’s not what it is like,” said Desai. “I want to be able to focus on quality. And the only way I think I can focus on quality is if my people are not focusing on things that don’t matter … I feel like I’m in a much better place because the smart people that I’ve hired are working on the riskiest and most complicated things.”

Continue Reading

Trending