The American Jobs Act of 2011 proposal was posted this week, and it contained a few tax-related changes or repeals for oil and gas subsidies in order to help pay for the bill.
The complexities of the oil and gas industry with regards to tax subsidies are not easy to summarize, but the bill’s section-by-section analysis did a great job of breaking it all down.
- Repealing the Deduction for Intangible Drilling Costs (IDCs): IDCs represent a cost of oil and gas exploration (i.e. research and development costs). IDCs generally consist of wages for drillers, including hauling and fuel costs. This proposal would not allow IDCs to be expensed immediately but rather capitalized over time as depreciable or depletable property starting in 2013.
- Repeal Expensing of Tertiary Injectants: Tertiary injection represent certain liquids and gasses that oil/gas companies inject around oil fields in order to increase the life of a certain oil field. The current proposal would eliminate the deductible status of these costs starting in 2013.
- Repeal Percentage Depletion for Oil/Natural Gas: Depletion is similar to depreciation in that independent producers and royalty owners can recoup capital investment over time. This proposal would repeal the percentage depletion method and replace it with a cost depletion method starting in 2013.
- Repeal Sec. 199 for Oil and Natural Gas Companies: This proposal would repeal the current manufacturing deduction just for the oil and natural industry. Originally, the manufacturing deduction (Section 199) was put into place to encourage the domestic production activities that were part of the American Jobs Creation Act of 2004. This repeal would take effect in 2013.
- Eliminate Oil/Gas Working Interest Exception on Passive Activity: Current law allows oil and gas companies to deduct investment losses if the investments are crafted in the form of working interest (interest meaning the requirement in cost sharing for property resource development). The American Jobs Act would repeal this exception.
- Increase Geological and Geophysical (G&G) Expenditures Amortization Schedule: Oil and natural gas companies generally incur costs for geologists and surveys which is referred to as G&G expenses in order to find potential oil/gas producing properties. Currently, integrated oil/gas producers currently can deduct these expenses over seven years while independent producers can deduct them over two years. Independent oil producers do not have yearly retail sales of than $5 million and they don’t refine more than 50,000 on any day. Companies that do not meet the aforementioned characteristics are considered “major” or “integrated” producers. This proposal makes independent producers abide by the same rules.
- Repeal the Enhanced Oil Recovery Tax Credit (EOR): Currently, oil/gas companies get a 15% credit for costs related to increasing the amount of crude oil that can be extracted from an oil field. This proposal would repeal the EOR credit starting in 2013.
- Marginal Well Production Tax Credit Repeal: Marginal oil wells are those wells that do not produce more than 15 barrels per day or those wells that produce at least 95% water with average production of no more than 25 barrels per day. Marginal gas wells do produce more than 90 Mcf on a daily basis. Currently, the credit rate is $3 per barrel of oil and 50 cents per 1,000 cubic feet of natural gas for tax years 2005 and adjusted for inflation for tax years after 2005 with certain phaseout restrictions. This tax credit would be repealed starting in 2013.
- Change to Foreign Tax Credit Rules for Dual Capacity Taxpayers: This mainly impacts oil and gas companies because nearly all oil and gas companies are dual capacity taxpayers. Currently, the foreign tax credit stops taxpayers from having to pay taxes twice on the same income (US taxes and foreign taxes). However, if a taxpayer is levied for a specific economic benefit from a foreign country then they are a dual capacity taxpayer. Therefore, they cannot claim a tax credit for the portion of the tax levy unless they can show that the “that the amount paid under a distinct element of the foreign levy is a tax, rather than a compulsory payment for a direct or indirect specific economic benefit.” The current proposal would make sure that an appropriate split is identified when a single payment is made to a foreign government, making the portion of the foreign levy that is attributed to an economic benefit a deductible expense instead of a credit.
- Separate Basket Treatment for Taxes Paid on Foreign Oil & Gas Income: All this section of the proposal does is move the “special credit limitation rules of Section 907 into a separate category within Section 904 for foreign oil and gas income. This section would yield to United States treaty obligations to the extent that they explicitly allow a credit for taxes paid or accrued on certain oil or gas income.”