What happens to intangible drilling costs in a functional allocation program?

In a functional allocation program, intangible drilling costs are considered deductible as incurred. This means that these costs can be written off in the year they are incurred rather than being capitalized or amortized over time. Intangible drilling costs typically include expenses associated with the drilling of wells, such as labor, materials, and other overhead that do not have a salvage value at the end of the drilling operation.

This treatment allows for immediate tax relief for companies engaged in drilling activities, enhancing cash flow and incentivizing exploration and production efforts. The ability to deduct these expenses in the year they are incurred provides a tax advantage that can support ongoing operations in the oil and gas industry, making it an important aspect for firms dealing with investment in natural resources.