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Line 77: − − [[file:about-taxes_fig1.png|left|thumb|{{figure number|1}}Federal income tax model for oil and gas transactions. Amounts are net to your working and revenue interest. Calculations are made each tax year. (After <ref name=pt02r16 />.)]]
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Special tax treatment for expenditures classified as ''intangible drilling and development costs'', or IDCs, is available to the tax payer. U.S. Treasury Regulation 1.612-4 states that “all expenditures made by an operator for wages, fuel, repairs, hauling,…, incident to and necessary for the drilling of wells and the preparation of the well for the production of oil and gas” are IDCs. A well is considered to be prepared for production when the wellhead is installed. Table 1 shows the current tax treatment of IDCs. Again, tangible items such as surface casing and production casing are classified as tangible expenditures, and the tax free return of the expenditure is recovered through depreciation.
Special tax treatment for expenditures classified as ''intangible drilling and development costs'', or IDCs, is available to the tax payer. U.S. Treasury Regulation 1.612-4 states that “all expenditures made by an operator for wages, fuel, repairs, hauling,…, incident to and necessary for the drilling of wells and the preparation of the well for the production of oil and gas” are IDCs. A well is considered to be prepared for production when the wellhead is installed. Table 1 shows the current tax treatment of IDCs. Again, tangible items such as surface casing and production casing are classified as tangible expenditures, and the tax free return of the expenditure is recovered through depreciation.
[[file:about-taxes_fig1.png|left|thumb|{{figure number|1}}Federal income tax model for oil and gas transactions. Amounts are net to your working and revenue interest. Calculations are made each tax year. (After <ref name=pt02r16 />.)]]
===Lease operating expenses===
===Lease operating expenses===
==Calculating after-tax net cash flow==
==Calculating after-tax net cash flow==
The recommended approach to calculate after-tax net cash flow (NCF) is to use Equation 1, which is
The recommended approach to calculate after-tax net cash flow (NCF) is to use Equation 1, which is