Hopkins CPA says oil and gas investors need to update 2026 deduction models

Joe Hopkins of Hopkins CPA Firm says a 2025 law restored 100% bonus depreciation for qualifying property, changing how oil and gas working interest investors should model 2026 tax deductions. He says older assumptions built around a phased-down bonus depreciation schedule may now understate first-year write-offs.

Why it matters: - Oil and gas investors who rely on outdated models may be missing larger first-year deductions for 2026 projects. - The change can materially affect after-tax returns, capital planning, and year-end tax decisions for working interest investors. - Tangible drilling costs and intangible drilling costs are treated differently, so the size and structure of a project now matter more.

What happened: - Joe Hopkins, CPA, MBA, founder of Hopkins CPA Firm in Corpus Christi, Texas, said many project models still assume bonus depreciation will phase down. - Legislation signed in 2025 restored 100% bonus depreciation for qualifying property acquired and placed in service after January 19, 2025. - Hopkins said investors who have not revisited their models may be underestimating deductions available in 2026.

The details: - Under the original 2017 tax law, bonus depreciation was scheduled to fall from 100% to 80% in 2023, 60% in 2024, 40% in 2025, 20% in 2026, and then disappear in 2027. - That old schedule shaped how oil and gas investors modeled equipment and drilling-related property for years. - Tangible drilling costs include wellheads, casing, tubing and storage tanks. - Tangible drilling costs typically represent 25% to 30% of total well costs. - Tangible drilling costs were traditionally depreciated over seven years. - Under the restored rule, qualifying tangible costs can now be deducted in full in the year the property is placed in service. - Intangible drilling costs cover labor, drilling fluids and site preparation. - Intangible drilling costs typically make up 70% to 80% of a well’s total cost. - Intangible drilling costs have long been fully deductible in the year incurred under a separate tax provision. - Intangible drilling costs were not affected by the bonus depreciation phase-down. - Combined, the restored treatment for tangible costs and the existing treatment for intangible costs can allow investors to deduct nearly the full amount of their investment in the first year. - Working interest investments also may qualify for a percentage depletion allowance tied to gross production income. - Working interest holders are generally exempt from passive activity loss limits that apply to many other investments. - Those rules can allow losses in some cases to offset other active income.

Between the lines: - The practical issue is not just the tax law change. It is the mismatch between current law and models built on prior assumptions. - Projects with different mixes of tangible and intangible costs can produce very different tax outcomes. - Placement-in-service timing and investment structure also affect the final deduction number. - Hopkins said models that were accurate two years ago may no longer be accurate today. - The 2025 restoration of 100% bonus depreciation is a clear benefit for investors who update projections before filing decisions are locked in.

What's next: - Investors still have time in 2026 to review project models before year-end filing decisions are finalized. - Hopkins CPA Firm is advising clients to compare current-year projections with the updated depreciation rules before finalizing tax strategy. - Investors who have not reviewed oil and gas models since the rule change should reassess them before year-end. - Hopkins CPA Firm says it provides tax planning, tax preparation, IRS resolution and business advisory services, with experience in oil and gas investments.

The bottom line: - For oil and gas working interest investors, the old 20% bonus depreciation assumption no longer fits current law, and that can mean materially larger 2026 deductions than many models show.