What are Intangible Drilling Costs?
Intangible drilling costs (IDC) are costs to develop an oil or gas well or the elements that are not a part of the final operating well. Intangible drilling costs include all expenses made by an operator incidental to and necessary in the drilling and preparation of wells for the production of oil and gas, such as survey work, ground clearing, drainage, wages, fuel, repairs, supplies and so on. Broadly speaking, expenditures are classified as intangible drilling costs if they have no salvage value. Since intangible drilling costs include all real and actual expenses except for the drilling equipment, the word "intangible" is something of a misnomer.
Understanding Intangible Drilling Costs (IDC)
The intangible drilling costs deduction has been allowed in the US since 1913 in order to attract investment capital to the high-risk business of oil and gas exploration. If a taxpayer makes an election to expense intangible drilling costs, the taxpayer deducts the amount of the intangible drilling costs in the taxable year in which it was paid or incurred.
Example of Intangible Drilling Costs
As an example of intangible drilling costs, if Company OIL wanted to develop a new oil well they would need to first go through a bunch of steps to prepare to drill the well. This may involve hiring people to conduct surveys, clear the ground area so they well can be built, build adequate drainage, and pay folks to work. Since these are not costs for the actual drilling equipment and have no salvage value after the well is no longer functioning, they are labeled as "intangible."