What if one of the most powerful ways to reduce taxes, protect wealth, and generate cash flow has been hiding in plain sight for over 100 years?

In this episode of Executive Connect, Melissa Aarskaug sits down with respected tax strategist Ed Lyon and Summit Ventures CEO Mark Elliott to break down why oil and gas remains one of the most effective tax strategies available to high-income earners, business owners, and investors. They explain how direct participation in energy projects allows investors to offset ordinary income, generate tax advantaged cash flow, and hedge against inflation, all while supporting domestic energy independence. This conversation demystifies oil and gas investing, explains why these incentives exist in the tax code, and shows how to evaluate opportunities properly so tax benefits support long-term financial goals, not risky speculation.

Chapters:

(00:00) Why oil and gas can offset ordinary income

(01:05) Meet Ed Lyon and why tax alpha matters

(02:10) What tax alpha actually means

(03:28) Why oil and gas have unique tax treatment

(04:14) The real reason Congress supports energy incentives

(05:48) How oil powers everyday products and the economy

(07:09) Energy independence and global stability

(08:31) Why do few people know about these tax benefits

(10:11) Direct participation vs oil stocks

(11:05) Intangible drilling costs explained simply

(12:33) How upfront deductions really work

(12:48) Tangible drilling costs and bonus depreciation

(14:12) Depletion allowance and tax advantaged cash flow

(15:49) Reducing taxes on earned income legally

(17:11) How fast investors see tax savings

(18:56) Who benefits most from oil and gas strategies

(21:33) Oil as a financial tool, not a tax trick

(23:18) Why due diligence matters more than tax benefits

(26:32) Oil as diversification and an inflation hedge

(28:23) Why proactive tax planning beats year-end scrambling

(30:02) Real case study with a high-income surgeon

(32:50) Entrepreneurs, exits, and family office planning

(34:03) Oil vs real estate and equities after tax

(36:02) Common misconceptions and real risks

(38:00) How to vet operators and projects

(41:22) Oil and gas demystified and investor education

(43:11) Final guidance on smart tax strategy

(44:01) Where to learn more and get started

(0:00) So there are a lot of ways that you can offset income, but they don’t necessarily offset (0:06) ordinary income. If you’re a surgeon and you’re making $600,000 a year and you buy a rental (0:11) property and the rental property generates losses, you probably can’t deduct those rental property (0:17) losses against your W-2 from operating on patients or whatever it is you do for your $600,000 a year. (0:26) But oil and gas, again, due to favorable legislation, due to Congress saying we need (0:32) energy.

With me today, I have Mark Elliott, CEO and co-founder of Summit Ventures, (0:38) who develops de-risk tax advantage oil projects with investment partners and Summit Ventures. (0:46) Today, we have a special guest with us, Ed Lyon. Mark, would you share a little bit about Ed with (0:52) us today? Yeah, absolutely.

It’d be my pleasure to tee this up. Listen, Ed, in addition to being (0:59) a good friend, is probably one of the most respected tax strategists in the United States. (1:05) Ed’s authored over a dozen books on tax planning.

He writes a weekly column that goes out to over (1:11) 100,000 professionals. He has been a regular on CNN, Fox News, MSNBC, CNBC, more than 500 times. (1:22) I think in life, sometimes they say, who’s the smartest man in the room? (1:28) And that’s the man or the woman that knows what to do next.

And when it comes to tax alpha, (1:34) and it comes to strategy, Ed is definitely that individual in the United States. And my pleasure (1:40) to have you on the show with us today, Ed. Mark, that’s an awfully kind introduction.

(1:45) Thanks, and it’s my pleasure to be here. Yes. Thank you, Mark.

Welcome, Ed. Excited (1:51) to chat with you. And let’s just get right into it today.

You described tax alpha as creating (1:58) returns before production even starts. For those who have never invested directly in oil and gas, (2:06) what does that actually mean? And can you break it down for our listeners? (2:10) Sure. So in most cases, when you’re starting any new financial activity, whether it’s starting a (2:17) business or an investment portfolio, you’re going to have to wait and see what happens (2:24) before you understand what the taxes are going to be.

Are you going to make money in which case you (2:28) pay taxes? Are you going to lose money in which case you get to deduct the losses against your (2:35) other income? Well, investing in the oil and gas sector gives you advantage to some rules that have (2:42) around for over 100 years in the tax code. And those rules let you start deducting expenses (2:51) right away before a project even drills in many cases. So you’re getting the advantage of investing (3:00) in a sector, the energy sector, where we’re seeing increasing demand in this country.

And if you (3:08) don’t understand the increase in demand for electricity, I have two things to mention. (3:12) One is crypto and the other is AI data centers. So it’s an opportunity to invest in an expanding (3:19) sector of the economy, but also take some hundred year old tax breaks to give you a head start (3:28) really in this particular investment race.

I love that. And don’t we love tax breaks in (3:36) the world today? Now talk to me a little bit. Why is this part of the tax code so unique compared (3:43) to realistic stocks, businesses, or passive LP investments? Well, I can give you two answers to (3:50) that.

One is the good faith answer is that Congress decided a long time ago that it was (3:58) in this country’s best interests to subsidize creating energy because energy is the foundation (4:06) of so much of our economy. If we have no energy, we have no economy. So Congress has decided that (4:14) that’s more important than subsidizing the broad stock market or broad real estate interests or (4:20) any particular kind of passive income generator that might be operating as a limited partnership.

(4:29) The cynical answer is that oil and gas industries have really good lobbyists, (4:35) and they’ve been able to do a very good job with Washington, D.C. I’m not that cynical, though, (4:41) because as I’ve mentioned a couple of times already on this presentation, this is over (4:46) 100 years of tax law. If this was just a boondoggle for oil producers, it wouldn’t (4:51) have survived the multiple rewritings of the income tax code that we’ve seen, 1913, 1954, (5:02) 1986, 2017. Tax breaks to encourage domestic production of fossil fuels and domestic energy (5:12) independence.

It’s a consistent story going back for longer than any of us have been alive. (5:20) And outside of the tax code, Jamie Dimon was recently quoted saying that we need clean (5:27) and reliable energy, not only for America, but for our allies. And we are going to be (5:32) heavily dependent on oil for the next several decades.

But when we start to look at oil, (5:37) why is it so important for the government to incentivize this in the tax code so we do have (5:43) energy independence? See, when you look at oil and gas, only 28 percent of it is used to move (5:48) goods and services. The great majority of oil is used on products like the very reason that Ed and (5:54) I can see you on this call today, eyeglasses and contacts and pacifiers and diapers. Could you (6:07) a tire, including Tesla? Those big fan blades for wind energy? Yes, those too.

All that requires (6:16) hydrocarbons in order to manufacture that. And literally in today’s society, we would be naked (6:21) and afraid. These little commodities that we have buttons that control whether we see cleavage or (6:25) not, right? All that is oil and gas, the fabric in our clothes, right? So it’s just extensive.

(6:33) And so for something that’s not going away, if we can have those tax incentives to reduce (6:41) what we’re paying, it makes a lot of sense. You make a good point about the geopolitics (6:47) of oil as well. It’s not just for domestic consumption.

So right now we’re involved (6:51) in a three-way negotiation trying to end a war in the Ukraine. Russia has attacked Ukraine. (6:57) There are European allies who are still buying oil from Russia because they need oil.

They’re (7:03) not going to shut down their economy in solidarity with the people of Ukraine. But when we can (7:09) increase domestic production, that means there’s more oil for our geopolitical allies around the (7:17) world. We talk about us not being hostage to Middle Eastern oil supplies.

Well, we don’t (7:24) want our allies to be hostage to hostile oil suppliers either. This episode is brought to (7:31) you by Summit Ventures. If you’re an accredited investor, Summit gives you access to one of the (7:39) greatest tax advantage opportunities, direct ownership in oil and gas.

Their projects deliver (7:46) what they call the triple play, cashflow, equity growth, and powerful tax benefits. (7:53) And here’s the best part. These investments qualify for 1031 exchanges.

That means you can (8:00) roll gains from real estate into energy while deferring capital gains. To learn more and get (8:07) a free white paper, oil and gas demystified, just visit www.summitven.com forward slash (8:18) executive connect. I love that.

I’m curious to get your perspective, Ed, (8:25) on what does the government gain by offering these kinds of incentives? (8:31) Well, if the government wants to collect taxes from anybody, there needs to be an economy. (8:36) Oil powers the economy. Therefore, the more oil and the less expensive oil we can put into the (8:44) economy, the more we’re going to grow the economy overall.

And as Mark says, it’s not just to put (8:49) in gas guzzling cars or locomotives or anything like that. A lot of hydrocarbons get made into (8:56) stuff. I don’t think there’s anybody watching this podcast who could open up a cabinet in their (9:02) kitchen and see something that wasn’t made from oil.

I love it. And I find it kind of a second (9:09) question to that, Ed. Why are so few people aware of these incentives? (9:17) Well, because the financial education that people get in this country is really pretty lame.

There (9:27) is a conventional wisdom about what to do with your money. And the conventional wisdom says that (9:33) you should stuff as much money as possible into your 401k pre-tax, grow that as much as possible. (9:40) Then in retirement, when you’ve dropped down into a lower tax bracket, you’ll pull your money out of (9:45) the 401k.

And you’re going to invest that money in the stock market, probably through a manager, (9:52) and there will be some petroleum in your portfolio. Your portfolio manager is going (9:58) to have Exxon Mobil or BP or Shell or companies like that because they’re a big sector of the (10:05) economy. What’s different about what Mark and I are talking about is these are direct (10:11) participations in oil and gas.

So the tax advantages that you get through direct participation (10:20) are not available to a stockholder who merely owns shares in a publicly traded oil company. (10:27) So that’s the difference. I love it.

Now, let’s break down (10:31) the key tax advantages in a way that’s clear and simple for our listeners and take the complete (10:37) mystery out of it. Walk us through the core tax tools and explain them to us as you would your (10:44) family. Well, I got a pretty smart family.

I like Warren Buffett’s suggestion. You explain it (10:51) to a first grader. I think he said, if you can’t explain your business to a first grader, (10:57) you don’t have a business.

So there are three primary tax breaks that accompany an investment (11:05) in the oil and gas sector. The first one, because it’s important up front, is something called (11:12) Intangible Drilling Costs, or IDCs. When you hear an oil man in Midland, Texas, talk about IDCs, (11:20) this is what he’s talking about.

The Intangible Drilling Costs, those are things like (11:26) administration, paperwork, upfront organizational costs. They’re not ordinarily deductible (11:33) until down the road when you have some income that you can deduct them from. But with the (11:42) petroleum business, Congress wants to encourage exploration.

They want to encourage drillers to (11:49) get out there and drill. So you can deduct those expenses up front as they are paid, (11:55) rather than waiting for income to offset. The way most direct participation programs are (12:04) structured, something like 80% or 90% of your upfront contribution will be deductible.

So (12:14) if you’re contributing $100,000 into an oil program, the driller is going to borrow some (12:20) money. So the leverage may mean that there’s $500,000 worth of cash going to work on your (12:27) share of the program. But you’ll be able to deduct probably $80,000 or $90,000 up front (12:33) for those expenses.

And this makes IDCs a great way to offset income from any source. We’ll talk (12:40) a little bit more about that down the road. The second thing is Tangible Drilling Costs.

(12:48) Tangible Drilling Costs are anything with a salvage value. IDCs, that’s anything that doesn’t (12:53) have a salvage value. So if a driller buys equipment, they can take advantage of something (12:59) called bonus depreciation, which just got added back into the tax code in July with the big, (13:06) beautiful bill.

So if they’re going to buy a crane, let’s say it’s a million-dollar crane (13:12) and the asset life is 10 years. Ordinarily, that would mean deducting the million dollars (13:18) over 10 years, roughly $100,000 a year. Well, that’s fine if the driller is spending $100,000 (13:25) a year on their crane.

Maybe they’re financing. Well, with 100% bonus depreciation, the driller (13:32) could put $50,000 down or $100,000 down on that crane and deduct the entire million dollars (13:38) right now. That means that you’re getting the tax deduction before you’re spending the money.

(13:47) That’s the key, getting the tax deduction before you spend the money. And anytime you can get a (13:53) tax deduction for an expense before you actually have to pay the expense, that works to your (13:59) advantage. So we’re essentially taking that expense and we’re putting it in Marty McFly’s (14:05) DeLorean and he’s bringing it back from the future for us now.

Then finally, there is a (14:12) third break and that is called the depletion allowance. It’s sort of like depreciation for (14:18) the oil well itself because we know that someday the well is going to go dry. So the depletion (14:24) allowance lets you deduct 15% of your gross revenue every year.

So you’re not going to pay (14:32) tax on that 15%. So deep breath. We’re writing off up front the IDCs.

That’s anything that doesn’t (14:42) have a salvage value. It comes up front. Second, we’re writing off the cost of equipment as quickly (14:48) as we can.

We’re creating that benefit where we’ve got the tax savings in our pocket and we don’t (14:55) have to spend those savings for a while. And finally, we’re not paying full tax on the gross (15:02) revenue. We’ve got that depletion allowance so we’re only going to pay tax on 85%.

And those (15:08) three advantages are really powerful if you harness them to the right investment. Now, (15:18) if you could do the same thing with a crypto mining stake. Okay, I should confess I’m a (15:24) crypto skeptic.

The only thing I know about crypto is you can’t spell crypto without cry. (15:28) But you’ve got much lower odds of making a fortune on your crypto investment. Whereas (15:34) oil and gas, geologists know where the oil is for the most part.

(15:41) It’s amazing. So you’re saying that this is one of the few investments that can reduce taxes on (15:49) earned income. Yes, you’re phrasing it properly.

What you’re doing is you are reducing ordinary (15:56) income from other sources. So there are a lot of ways that you can offset income, but they don’t (16:03) necessarily offset ordinary income. If you’re a surgeon and you’re making $600,000 a year and you (16:11) buy a rental property and the rental property generates losses, you probably can’t deduct (16:17) those rental property losses against your W-2 from operating on patients or whatever it is you do (16:25) for your $600,000 a year.

But oil and gas, again, due to favorable legislation, due to Congress (16:32) saying we need energy, oil and gas, the IDCs can offset ordinary income from a W-2. They can offset (16:39) capital gain from the sale of real estate or a business. And you’re going to get a cash flow (16:46) from the activity, which itself is partially tax advantaged, sheltered by the depletion allowance.

(16:54) This is so huge. And I think about all the high W-2 earners in the world today in the tech sector, (17:03) it’s significant tax savings on what I’m hearing you say. So how fast do these benefits usually (17:11) show up for investors who invest in these drills? Mark, let’s have a dramatic answer from you, (17:18) because I think they’ll like the answer.

Yeah. So when you’re in the last quarter of the year, (17:25) the time to really feel that impact is so quick. We have wells that we’ll be drilling in December.

(17:32) So if there’s people with tax issues out there, call us, we can help. But literally, you invest, (17:38) we’ll stick with Ed’s example. You put $100,000 into a project, $80,000 or $90,000 of that (17:45) investment is immediately deductible off your ordinary or passive income.

So whether you file (17:53) your taxes on January 1, you get it done timely by the 15th, or you’re part of the Mark Elliott (17:58) Club and you file an extension and they all get finalized in October. That’s when you’re going to- (18:04) You’re going to fill that club too. Yeah.

Well, you’re ultimately going to (18:06) fill that impact, but it’s right away, Melissa, it’s immediate. (18:10) Yeah. So if you’re paying your tax, let’s say you’re retired and you’ve got pension income (18:16) and you’ve got IRA required minimum distributions, and you’re making quarterly payments on your (18:22) estimated taxes, well, the fourth quarter estimated payment is due on July 15th.

If you (18:28) make $100,000 investment into a program with $90,000 of IDCs, depending on your tax bracket, (18:35) that’s going to mean a smaller fourth quarter payment or possibly no fourth quarter payment (18:40) at all. Yeah. (18:41) So how soon can you see your savings literally as fast as you can file a new W-4 with an employer (18:48) or change your next quarterly withholding payment? I love this.

So let’s talk a little bit about who (18:56) actually benefits the most. I know when I first heard about this, I assumed that it was only for (19:03) people that worked in the oil and gas space. And since I was in the tax sector, I wasn’t able to (19:09) participate, but that’s not the case here.

So who is, I guess, who is this strategy, (19:16) especially most powerful for? So it’s going to be most powerful for (19:22) anybody who has a significant income, but it’s not going to be limited to only those who own (19:30) a business or only those who have this type of income or that type of income. So I used a doctor, (19:38) a high income W-2 doctor, lawyer, Indian chief, whatever it is that they do to earn that income. (19:44) Business owners typically operate their businesses as pass-throughs so that the income passes (19:50) through directly to them.

When I do comprehensive tax planning, the first thing I do for a business (19:56) owner is look at ways we can keep income from flowing through on a K-1, but then we look at a (20:02) whole host of individual level strategies. These are typically investment or charitable vehicles (20:09) where the client can get a real bang for their buck. We do a lot of oil and gas with entrepreneurs (20:16) who just exited a company.

So I have a call later today. It’s, well, we’ll schedule the call for this (20:25) week. We’re recording this on December 1st.

This particular business owner sold a company for eight (20:32) figures in August and is just now looking for a year-end strategy. This would work for him. (20:39) And there’s no size limit.

So it’s something that an ordinary investor can do as long as (20:47) they meet the program minimums. But if you’re a billionaire or if you’re a family office, (20:53) odds are pretty good that you’ve already got some direct participation oil and gas in your (20:58) portfolio already. I love this because I have often felt that I am extremely overtaxed, Ed.

(21:09) Melissa, that makes you an American. Substantially overtaxed. It’s in our DNA since 1776.

(21:17) Okay. So I’m not feeling alone here. And I’ve had to re-flip kind of this narrative a bit.

(21:25) So and really look at this as an investment, as a strategic financial tool. So can you unpack that (21:33) a little bit for me? So for those of us who have been W-2 income earners for a long time, I think (21:39) it’s something that we’ve had to learn that it’s really actually a financial tool, as you kind of (21:45) mentioned with the 401ks and other things, but it’s more strategic for those who are overtaxed. (21:51) So ultimately it is a financial tool first with significant tax advantages that come second.

(22:01) If all you want is tax losses, I’m sure there are some wonderful penny stocks (22:07) and an investment opportunity from a prince in Nigeria where you can put your money in and you (22:13) can lose your money. You’re going to lose your shirt in a lot of things. That’s a tax advantage, (22:18) but it does not get you closer to your financial goal.

So I tell clients, my job is not just to (22:23) help you save taxes. My job is to help you reach your financial goals with the minimum of (22:30) interference from tax. So if you’re putting money into oil and gas, it is first and foremost (22:36) an investment.

So you want to evaluate it like any investment. And Mark, you can talk in more detail (22:45) about what you look for to vet a partner in the oil and gas space. Then you can go to your CPA (22:52) and you can say, Hey, is this deductible? And if the CPA knows anything about oil and gas, (22:57) they’re going to say, there is no vetting.

There is no due diligence on the tax portion (23:02) of an oil and gas investment. We know what the tax treatment is going to be. (23:07) You’re not going to get audited because you invested in this program.

It’s not an IRS red (23:12) flag. It’s not a gray area. The real homework that you need to be doing is on the investment side, (23:18) not the tax side.

Ed, just to build on that, I really like what Ray Dalio has taught us about (23:26) getting our money into uncorrelated buckets. And the more money that we have, the more global (23:32) we have to be in perspective with that thought process. But some of the things that I love (23:38) about oil is that within that bucket, it is an inflation hedge.

It is uncorrelated to the (23:43) stock market. It’s something that throws monthly cashflow on an appreciating asset. So when you (23:48) exit the field, there’s a couple different triggers that you make money from.

But it’s (23:54) like you just used the example of somebody eight months after a sale calling and it’s December (24:00) on tax planning. What do we do to save now? And where oil can help you if you’re very reactionary, (24:06) I think what Ed would really encourage you to do is that tax planning isn’t something that you do (24:11) in Q4. It’s something you’re doing every year.

It’s something you do every year. It’s a year-round (24:18) responsibility. Correct.

And so you’re not looking at that big final tax bill, (24:25) but you’re looking at what you’re paying in quarterly. There’s always an opportunity to (24:28) write a smaller check and it’s something that has to be actively managed. And when you don’t (24:33) spend time on it, those are the dollars that slip through your fingers.

Right. And it’s so easy to (24:40) stop them from slipping through your fingers. The key is planning in a proactive attitude.

(24:46) CPAs, for the most part, do a great job telling you how much you owe. Most of them don’t really (24:52) do much to tell you how to pay less. And Melissa, you made a good point earlier as well.

W2 employees (24:59) are told that they don’t have tax planning opportunities. A lot of people will say, (25:06) oh, it’s the business owners. It’s the real estate owners.

It’s the entrepreneurs. (25:11) They’re the ones who have the opportunity to do the really fancy tax planning. (25:16) And some of the fancy tax planning is limited to business owners.

I had a conversation earlier (25:21) today with a client about reorganizing one aspect of his business and setting up a new entity for (25:28) it. That’s where a lot of those deep conversations go. But high income W2 earners, particularly once (25:36) you get into the 32% tax bracket and above, which is usually going to correlate with around $400,000 (25:43) in income.

Once you get into the higher tax brackets, there are opportunities for W2 employees (25:52) to pay less in tax. There are some newer opportunities and there are some classic (25:58) opportunities. And the most classic opportunity of all of them is oil.

And I think, Mark, it’s (26:06) interesting that you mentioned that because I was thinking, does this work best as a (26:13) diversification strategy or is it just part of a broader tax plan? And I don’t know if that (26:19) question’s maybe for you, Mark, but it made me think, or Ed, but it made me think when you (26:25) mentioned that, Mark, as a diversification strategy. You know, I feel that they are (26:32) interconnected, right? It’s great for diversification. It’s great for taxes, (26:37) but this is really strategy, right? And I think you can take some correlation from Michael Gerber’s (26:43) book, The E-Myth, where he says you’re either working on your business or you’re working in (26:47) your business, right? And it’s the difference between strategic and tactical.

What’s the (26:52) difference with your money though? You’re either working on your money or you’re in it, right? And (26:58) you’re not looking at all the angles. This conversation today is about looking at the (27:02) angles. Where can we maximize for the same time or effort that we spend every year? What if you (27:09) can put another 300,000 in your pocket? Well, what did it take to do that? Well, it took a (27:13) conversation with a guy like Ed Lyons, right? And lining up the right strategic investments, (27:19) right? And it’s not oil, right? You look at real estate and multifamily and accelerated (27:26) depreciation.

Is it as good as oil? I have been in and out of a hundred deals and I have never, (27:33) ever seen something that was so taxed advantaged on the front end with IDCs or even the ability to (27:40) 1031 into oil because working interest is considered real property. While you hold that (27:48) asset because our country needs energy independence, that first 15% of all that revenue that (27:52) comes out of the ground is tax-free. And then when we go to exit, well, guess what? You can (27:58) 1031 and compound, right? Or create a flywheel of cashflow for yourself.

Take return of principle, (28:05) whatever profits you want, but the ability to compound part of that return and really be able (28:10) to maximize that and that strategy. So if you can make more money and pay less in taxes, I think (28:17) that would make everybody smile a little bit more at Christmas time. Yeah.

Ideally, oil and gas comes (28:23) as part of a comprehensive, holistic top-down tax plan. That takes time. In December, we typically (28:32) don’t have time to do the comprehensive, holistic top-down plan.

So we may start with oil and gas, (28:39) knowing that that’s going to play a really big difference in the 2025 tax bill. Then we (28:46) look at starting in 2026. We hit the ground running, ideally in the first quarter.

We put together the (28:52) plan so that by the end of the year, when everybody else is scrambling for tax breaks, our clients are (28:58) enjoying Christmas eggnog with their grandchildren. This episode’s sponsor is a couple I absolutely (29:04) love, David and Alexis Keeley. They help power couples be successful at home, just like they (29:11) are at work.

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DavidandAlexisKeeley.org, code EXECUTIVE1. (29:41) I love it. Okay, so we’ve got to talk some case studies and the real numbers.

(29:46) Let’s make this real for people to understand. Walk us through some of the narrative examples (29:52) you’ve explained already, the surgeon, the entrepreneur, the family office. (29:56) What did their outcomes look like based on what they were making and what they saved in taxes? (30:02) So let’s start with Dr. Bieber.

He’s making a million dollars a year and he’s pretty proud (30:08) of himself, right? You guys know what the difference is between God and a surgeon? (30:13) A surgeon doesn’t think, or God doesn’t think he’s a surgeon. So Dr. Bieber is making a hundred (30:18) thousand dollars a year and he’s got the usual collection of itemized deductions. He’s probably (30:26) paying about $350,000 in tax.

Now, let’s say that he puts $200,000 into an oil and gas program (30:38) with a 90% IDC. That means he’s going to eliminate $180,000 from his taxable income. (30:49) He is in the 37% tax break.

So what that’s going to do right up front is save him $66,600 in taxes. (31:02) So his actual cost to put $200,000 into an oil investment is really more like $135,000 (31:13) because he doesn’t have to pay tax on such a big chunk of what’s going into the program. (31:19) Now he’s going to get an investment return.

He’s going to get cash flows over time. He’ll get (31:27) the 15% depletion allowance, meaning that 15% of every barrel that comes out of the ground (31:34) is tax-free to him. And then depending on the program, we look at the exit.

So Mark mentioned (31:41) a 1031 exchange. That’s a tax-free exchange from one property to another. I’ve got a dozen different (31:47) ways to offset tax when you’re flipping out of an oil property, depending on the size of the (31:53) property and the amount of any taxable gain.

Now, what about the entrepreneur and the family (32:01) office? So it’s the same math for any client. An entrepreneur is probably going to have pass-through (32:10) income from his company coming through on a K-1 and he’s not spending it. So a lot of (32:18) entrepreneurs, they’re going to leave their money in their company and yet they have to pay tax on (32:24) it.

So if an entrepreneur wants to invest outside of their company, they can move money into oil and (32:31) gas and they can get the upfront IDCs from the oil and gas program. That lowers the cost of making (32:41) an investment. It leaves more for them to reinvest in their business.

For a family office, (32:50) this is usually a multi-generational vehicle. So when you start a family office, it’s not just (32:59) because you want a professional investment manager working for you. You can get that anywhere.

(33:04) It’s not just because you want a general contractor for your finances. And that’s essentially what a (33:09) family office director is. They’re your general contractor for your finances.

But family offices (33:15) typically are just as concerned with preserving assets and passing them on to the next generation (33:23) as they are with making assets grow. So you’ve got multi-generational considerations, (33:29) you’ve got asset transfers, you’ve got, in many cases, you want to transfer income to adult (33:36) children and maybe even trust for grandchildren. And so the tax breaks that you get from oil and (33:42) gas can play a part in all of that planning.

These are amazing case studies, how important (33:51) when you understand the tax code, it’s so beneficial to savings. So I’m curious, (33:56) how do these stories compare to after-tax returns they’d get from, say, real estate or equities? (34:03) Well, so real estate does give you a lot of deductions against the real estate income, (34:12) the depreciation rules for real estate, and depending on whether you can take the deductions (34:20) or not, first year expensing on personal property within real estate. However, for most real estate (34:26) investors, they can’t actually take the losses against their ordinary income.

They have to (34:31) suspend those losses, and they don’t get to deduct the losses until they have sold the property (34:38) in a fully taxable transaction, meaning if you do a 1031 exchange, you don’t unlock those losses. (34:46) The other thing about real estate is whoever invented the expression that real estate is (34:54) passive income is a liar. It’s just a filthy, disgusting liar.

I don’t know if you’ve ever (35:00) managed rental property. I’ve owned one commercial building, and I own one single (35:05) family house now, and I am happy to send 10% of my gross rent to the property manager so that I (35:11) don’t get a 3 a.m. phone call about something that’s going wrong in this house that I own. (35:18) So direct participation in oil gives you many of the tax advantages of being right there in (35:25) a Permian basis yourself, but you’re enjoying those tax breaks from the comfort of your home, (35:32) which is probably heated with the oil that you’re investing in.

(35:36) Yeah. I love it. Okay, so let’s clear up some of these misconceptions and really understanding (35:44) the risks of these type of investments.

So anytime there’s strong tax benefits, people (35:51) get skeptical. Let’s be serious. So talk to me a little bit about the biggest misconceptions (35:57) that you hear in the field about oil and gas investing.

(36:02) Well, as I said a few minutes ago, this is first and foremost an investment decision. (36:09) I want you to make the decision that energy plays a role in your portfolio, (36:15) and then I’m going to help find the most tax efficient way for you to invest in energy in (36:22) your portfolio. So the biggest, I wouldn’t call it a misconception so much as people don’t (36:29) understand the difference between different programs and different operators.

People think (36:34) that oil is monolithic and that all oil projects are the same. And that really just, that is a (36:41) misconception. There are oil programs where you can go in and basically reopen an old well (36:48) that stopped being efficient for a producer 40 years ago, but things have changed in 40 years.

(36:55) We’ve got new technology. We’ve got new ways to find reserves that were not economical (37:01) to receive previously. The whole concept of fracking is built around that.

So the tax (37:08) benefits are great. They don’t eliminate the operational risk. So you want to vet your (37:14) program.

In many cases, the company may be new, but if the company is new, there’s probably some (37:23) grizzled old veteran who’s running the company. So you want to do a deep dive into who the people (37:29) are that are running the company. And when you see a management team that’s got people with (37:34) 30 years of industry experience, and the CEO has done one thing, and the COO has done another (37:41) thing, and the chief geologist has 40 years of experience and graduated from school when the (37:48) dinosaurs were still becoming oil underground, those are the sorts of things that you want to (37:53) look for.

Absolutely. Just to piggyback that, Melissa, I think there’s four things when people (38:00) are doing due diligence in oil and gas. The geology dictates what the profitability is going (38:08) to be long before an operator ever puts a drill in the ground to produce that oil.

But that (38:14) operator is the second most important thing because a bad operator will mess up good rock, (38:20) will mess up good geology. And if you look at the way that a grand sommelier (38:26) will drink wine and can tell you about the flora that’s in it or can tell you about the stones or (38:32) the twigs that’s in the dirt, when you look at operators and those teams, they know the (38:39) personalities of that dirt. So you’ve got to have somebody who has expertise in a particular basin (38:44) in a particular field because if you have expertise that’s in the Permian and you’re in (38:48) Texas, well, those are two different skill sets.

And then infrastructure is important. (38:56) When we start to look at the way that this oil is underground, it’s because a lot of this used (39:00) to be seabed. So down there without that oil is a bunch of salt water.

So when you pump up oil, (39:05) you’re also pumping up water. So say 30% of what’s coming out of the ground is water. (39:10) If you don’t have infrastructure to dispose of that water back into the ground, (39:16) it may cost you $4 a barrel to haul it off and erode so much profitability in your project.

So (39:21) infrastructure is important. And then I think the last piece is alignment. Are the sponsors of this (39:29) opportunity, do they have their money in the deal? Is it sitting next to yours with the same rights (39:33) and preferences? How is the operator aligned in there? Are they just getting promote or carry (39:39) in the deal with no skin in the game or do they have to earn it in? And I think all of those pieces (39:46) underlying in an opportunity is what really helps you vet it.

(39:51) I love it. And it’s not just a tax trick. It’s a well-established part of the U.S. (39:55) code designed to optimize domestic energy development.

But I’m curious, (40:01) one of the things I was curious about at the beginning when I learned about this is, (40:07) how do you help investors separate legitimate opportunities from these aggressive promoters (40:16) that are out there that talk about this? That’s the challenge. And I’m going to defer to Mark (40:22) because he’s in the oil and gas sector himself, as opposed to me observing it from the sidelines. (40:31) That is the challenge, Melissa.

That’s not going to go away, right? And I think that’s because not (40:37) one person in 10 that got into their first oil deal really knew what they were doing. (40:43) And you’re touching on a passion project of mine, so you’ve just unleashed something here. (40:50) As I went through this, I garnered a lot of information about oil, right? I grew up in (40:55) the tech space, right? I had four nice exits in tech and wasn’t an oil man by trade, right? Now, (41:01) I’ve got a business partner who’s probably one of the best oil finders that Texas has ever had.

(41:08) But when you look at de-risking these opportunities, it took me millions of (41:17) dollars to learn what I know today. And so I’ve took all this culmination of this information (41:22) and I’m writing an ebook right now. We’re within weeks of this being finished, that this is (41:28) something that we can even send out to anybody who requested.

But it’s oil and gas demystified (41:34) around direct investments, which is really just a blueprint for high net worth individuals about (41:39) how to do due diligence. What do you look for in the structure of the deal? What do you look for (41:45) in the geology? What do you look for in the operator? What does alignment look like in a (41:50) good structured deal? And it starts to give the baselines that where they can match this up (41:56) and provide the tough questions that you need to be asking to where you get the insight to get (42:02) comfortable with the deal, or more than likely with most oil and gas companies, get the red flag (42:07) and boot out of that conversation. And if you really find a sponsor who has their own money in (42:17) the deal, you’re 60 or 70% there.

When they’re looking for partnerships and your partnerships (42:24) allows them to drill more wells and they’re using their money, well, they’ve already got the smart (42:29) people on staff, right? They’re not selling you, they’re looking for your partnership. (42:34) And those are just some gut instinct as you go through the due diligence, you’ve got to pick up (42:38) on those things. But happy over time, that’s things that our company educates people on as well.

(42:45) I love that. I think this conversation has demystified one of the most, I would say, (42:51) misunderstood investment categories out there. So thank you both for sharing your knowledge and (42:58) time.

I want to add any final thoughts before we close up here that you want to leave with (43:02) our listeners. It’s what I’ve said throughout the presentation, make your investment decisions first (43:11) then find the most tax advantage way to make that investment choice. I see a lot of people doing a (43:18) lot of foolish things in the name of paying less tax.

Like I said earlier, we’re Americans, (43:23) it’s in our DNA. We trace it back to July 4th, 1776. Just make sure that you’re not doing (43:30) something that’s potentially more injurious to your finances than paying the tax.

The good news (43:37) is we can help you do exactly that. I love that. Mark, anything you want to (43:43) close up and share with our listeners? Absolutely.

I’m a patriot. I love the (43:53) oil. Well, get an appreciating asset that’s giving you cashflow on a monthly basis.

(43:58) And if you say, yes, Mark, I’d love to do that, but I don’t know anything about oil. (44:01) I’d like you to go to our website to summitven.com forward slash executive connect. (44:11) There’s a form fill on that page.

We will send you a copy of oil and gas demystified that will (44:17) teach you how to do due diligence that will teach you about this tax framework. And then we would (44:22) be more than happy to have a conversation with you and understand what your personal (44:26) situation is, your financial goals, and help you direct you towards a product (44:30) that not only can make you some money, but secondarily save you some money in taxes. (44:36) I love it.

Thank you both for being here today, sharing your knowledge and your time with our (44:42) listeners and doing the good, good work you do for this country and for the industry. (44:47) That’s the executive connect podcast.