When an owner develops a property for oil or gas production, there are two classes of costs: Intangible expenditures, such as chemicals, grease, labor and drilling mud, are fully deductible as expenses in the first year. The tangible drilling costs for the equipment used in the operation, such as well rigs and machinery, are treated as capital items. All capital equipment is also fully deductible, but it must be depreciated and deducted proportionally over its useful life.

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