FAQs

Our funds are limited liability companies or limited partnerships (structured to be taxed as partnerships for federal income tax purposes) with a management fee of 1.5% of unreturned capital and 20% performance fee after a manager catch-up.  After a capital deployment period (usually less than 18 months) our funds distribute all operating cash flow to investors.   Cash calls are aligned with asset acquisitions over the capital deployment period.  Of note, in two of our last three funds, investors began to receive quarterly distributions before the final cash call was made.

Investors receive quarterly distributions after the fund’s portfolio reaches stable cash flow, which typically is within 18 months of closing.

Five States funds are structured as limited liability companies (LLCs) or limited partnerships and taxed as partnerships. This means each individual investor or grantor trust (referred to as a “Member”) is treated as a partner in the Fund for federal income tax purposes.

Yes. After the end of each tax year, Five States provides each Member with a Schedule K-1. This form outlines your share of the Fund’s income, gains, losses, deductions, and other tax-related information. 

Our management is very sensitive to ensuring alignment of distributions and tax obligations, and will work to prevent phantom income, although no guarantees against phantom income can be provided.

Your investment may include several key components for tax reporting:

• Ordinary income from oil and gas production.
• Depreciation on tangible assets (e.g., storage tanks, pumps, piping).
• Depletion deductions on oil and gas production income, either cost or percentage-based.
• Expensed intangible drilling costs (IDCs), which the fund will amortize over a number of years.
• Capital gains/losses under Section 1231 for long-term oil and gas property sales.

Yes. Generally, individuals and grantor trusts can only deduct passive activity losses against passive income. Most income from the Fund is considered passive, so any losses may only be used to offset similar types of income. Suspended losses may be carried forward to future years.

If required or elected under law, the Fund may pay taxes on your behalf. This will be treated as a cash distribution to you for tax purposes and should be accounted for accordingly when preparing your return.

It is not anticipated that Five States’ non-operating PDP funds will generate significant intangible drilling cost (IDC) deductions, since little to no drilling activity is planned. The fund strategy primarily focuses on acquiring proved developed producing (PDP) interests, which are already in production. Under current federal tax law, an investor’s use of his or her share of a fund’s IDC deductions would be limited to offsetting the investor’s net passive income from passive trade or business activities because the investor’s fund interest is structured to limit the investor’s liability with respect to working interest owned by the fund.

Yes. Five States’ funds are structured as limited liability companies (LLCs), which are taxed as partnerships. This structure avoids double taxation—income is not taxed at the fund level. Instead, all taxable income flows through to Members based on their allocable share of income, allowing for potentially more efficient tax treatment.

Most income is treated as ordinary income. However, certain gains or losses from the sale of working or royalty interests may qualify for lower capital gains tax rates. Note that portions of previously claimed depletion or depreciation may be subject to recapture and taxed as ordinary income upon sale.

Yes. Sales of working and royalty interests typically result in gains or losses, which may qualify for capital gains tax treatment if the assets have been held for more than one year. However, a portion of these gains may be taxed as ordinary income due to recapture rules related to depletion and depreciation.

Yes. Investors benefit from depletion deductions—either “cost depletion” or “percentage depletion,” whichever is greater—on income derived from oil and gas production. These deductions can help offset a portion of the taxable income.

For informational purposes only: not legal, financial, or tax advice.