7797. If the limited partnership elects to capitalize intangible drilling costs, how does a limited partner treat his allocated share of such costs?Nuco Employeercline202014-07-14T17:58:00Z2014-07-14T17:58:00Z35413085Summit Business Media257361914Site Map/Investments/Oil and Gas/Intangible Drilling CostsTaxFactsDefaultArticle122801250-00-tf2.xml1250.00;#1913;#0x010100C568DB52D9D0A14D9B2FDCC96666E9F2007948130EC3DB064584E219954237AF3900242457EFB8B24247815D688C526CD44D009C4E67E972694125ABDA91AC61F5E51FTax Facts 2If the limited partnership elects to capitalize intangible drilling costs, how does a limited partner treat his allocated share of such costs?700.000000000000TaxFactsDefaultArticleSBMEDIA\moss-admin2010-01-14T22:02:04Z7797. If the limited partnership elects to capitalize intangible drilling costs, how does a limited partner treat the allocated share of such costs?If the limited partnership has elected to capitalize intangible drilling and development costs, each limited partner must treat the allocated share of such costs as a capital expenditure. Subsequently, each limited partner may recover a share of these capital expenditures on the income tax return through depletion or depreciation.Treas. Reg. §1.612-4(b). In the case of an electing large partnership, see below.A limited partner may recover the limited partner’s share of the cost of a particular item of intangible drilling costs that is not represented by physical property through the allowance for depletion (See Q 7799). Expenditures for clearing ground, draining, road making, surveying, geological work, excavation, grading, and the drilling, shooting, and cleaning of wells are considered not to be represented by physical property and thus may be recovered through depletion.Treas. Reg. §1.612-4(b)(1).Amounts of intangible drilling and development costs capitalized and represented by physical property may be recovered by depreciation (See Q 537). Thus, a limited partner will capitalize and depreciate an allocated share of expenditures paid for wages, fuel, repairs, hauling, supplies, etc. used in the installation of casing and equipment and in the construction on the property of derricks and other physical structures.Treas. Reg. §1.612-4(b)(2).If intangible drilling costs are incurred under a drilling contract (e.g., a turnkey contract), the intangible drilling costs under the contract must be allocated between depletable and depreciable classes of costs for purposes of calculating depletion and depreciation at the partner level.Treas. Reg. §1.612-4(b)(3).As to how intangible drilling and development costs incurred with respect to a nonproductive well (i.e., a dryhole) are treated by a limited partner, see Q 7796.Electing Large PartnershipsAn electing large partnership generally calculates depletion and depreciation deductions (including those representing capitalized intangible drilling costs) at the partnership level. In the case of a limited partnership interest, these deductions are generally aggregated with other items of income or loss from passive loss limitation activities of the partnership and are considered one passive activity.IRC Sec. 772(c)(2). In the case of a general partnership interest, deductions allocable to passive loss limitation activities are generally taken into account separately to the extent necessary to comply with the passive loss rule.IRC Sec. 772(f). However, in the case of a partner who is a disqualified person, items of income, gain, loss, deduction, or credit from oil and gas property are treated under the regular partnership rules discussed above. A disqualified person is a retailer or refiner of crude oil or natural gas (see Q 7803) or any other person whose average daily production of domestic crude oil and natural gas exceeds 500 barrels.IRC Sec. 776(b)(2)(B). See Q 7701 regarding electing large partnerships; see Q 7910 regarding the passive loss rules.