Oil and gas drilling deductions vs solar credits for high earners
By the Tax Field Guide editorial team. Published 2026-10-26. Facts checked 2026-10-26. Related strategies: Solar Investment Credits, Accelerated Depreciation.
Education only; not tax, legal or investment advice. Tax rules change, and how they apply depends on your facts. No outcome is guaranteed.
High earners looking for a deduction or credit against wages are often pitched two energy ideas: oil and gas drilling partnerships and solar investments. They work very differently under the tax rules. This guide compares them; it is not a recommendation of either.
Oil and gas: intangible drilling costs and the working interest exception
- Intangible drilling costs (IDCs). Section 263(c) directs the IRS to allow taxpayers the option to deduct intangible drilling and development costs of oil, gas and geothermal wells as expenses, rather than capitalizing them. This does not apply to wells outside the United States.1
- The working interest exception. A working interest in an oil or gas well that you hold directly or through an entity that does not limit your liability (such as a general partner interest) is not a passive activity, whether or not you materially participate.2 That is the feature that lets drilling losses offset wages. If your liability was limited for part of the year, some of the items can be treated as passive.2
The trade-off is that unlimited liability is real: a general partner in a drilling program can be responsible for the program's obligations. Losses can also be limited by the at-risk rules and the excess business loss limit.34 The IRS publishes an Oil and Gas Audit Technique Guide for its examiners.5
Solar: credits that are usually passive
A solar investment credit (§48E) is a credit, not a deduction, and it is a general business credit. If you do not materially participate in the solar activity, the credit is a passive activity credit and can generally offset only tax on passive income.2 There is no solar equivalent of the oil and gas working interest exception. See solar credits and the passive activity rules.
Solar also has a deadline: a facility that begins construction after July 4, 2026 must be placed in service by December 31, 2027.6 See the solar credit in 2026.
Side by side
| Oil and gas working interest | Solar investment (passive investor) | |
|---|---|---|
| Main tax item | Deduction (IDCs, depreciation, depletion) | Credit (plus depreciation on reduced basis) |
| Offsets wages? | Can, through the working interest exception | Generally no, unless you materially participate |
| Key cost | Unlimited liability during the period of the working interest | Passive limit; recapture within 5 years |
| Other limits | At-risk rules, excess business loss limit | At-risk rules, 2027 placed-in-service deadline |
Red flags
For solar, our three red flags are zero-down or no-money-out-of-pocket pitches, 0% or below-market seller financing, and equipment valued well above retail or market price; see is solar tax equity legit?. For any drilling program, read the offering documents for how liability is structured and ask a professional to review the projected deductions against the at-risk rules.
Common questions
Can oil and gas investments offset W-2 income?
A working interest held directly or through an entity that does not limit your liability is not a passive activity, so its losses, including deductions for intangible drilling costs, can offset nonpassive income such as wages, subject to the at-risk and excess business loss limits.
Is a solar tax credit better than oil and gas deductions?
They are different tools. Oil and gas working interests can produce nonpassive deductions but carry unlimited liability; a solar credit is usually passive for an investor who does not materially participate. Which fits depends on your income, risk tolerance and participation.
What are intangible drilling costs?
Costs of drilling and developing oil, gas and geothermal wells that section 263(c) lets taxpayers elect to deduct currently instead of capitalizing, for wells in the United States.
Education only; not tax, legal or investment advice. Talk to a qualified professional before acting.
Sources
- 26 U.S.C. §263(c) and (i), https://www.law.cornell.edu/uscode/text/26/263
- IRS Publication 925, Passive Activity and At-Risk Rules, https://www.irs.gov/publications/p925
- 26 U.S.C. §465, https://www.law.cornell.edu/uscode/text/26/465
- 26 U.S.C. §461(l), https://www.law.cornell.edu/uscode/text/26/461
- IRS Publication 5652, Oil and Gas Audit Technique Guide, https://www.irs.gov/pub/irs-pdf/p5652.pdf
- 26 U.S.C. §48E, https://www.law.cornell.edu/uscode/text/26/48E