Series 7 practice questionmediumAlternative Investments — DPPs
Which of the following is a characteristic unique to oil and gas exploratory (wildcat) programs?
- AThey drill in unproven areas with the highest risk but greatest potential deductions from intangible drilling costs✓ Correct answer
- BThey invest only in proven oil reserves
- CThey provide guaranteed income through existing production
- DThey have lower risk than income programs
Explanation
Why A — They drill in unproven areas with the highest risk but greatest potential deductions from intangible drilling costs
Exploratory or wildcat oil and gas programs drill in unproven areas, carrying the highest risk of all oil and gas DPPs — many wells may produce nothing. However, they offer the greatest potential tax deductions because intangible drilling costs (IDCs), which can represent 60-80% of total costs, are generally deductible in the year incurred. Income programs, in contrast, purchase existing producing wells with lower risk but fewer deductions.
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