Explanation of the Obama Administration's Oil and Gas Tax Proposals
On May 11, 2009, the Treasury Department released an explanation (the “Explanation”) of the Obama Administration’s oil and gas tax proposals for its fiscal year 2010 budget. The Explanation summarizes a number of amendments to the Internal Revenue Code that may be applicable to your business, including the proposed (1) repeal of expensing of intangible drilling costs, (2) increase of the amortization period for geological and geophysical costs to seven years, (3) repeal of percentage depletion, (4) repeal of the domestic manufacturing deduction for oil and gas production, (5) repeal of the passive loss exception for working interests in oil and gas properties, (6) repeal of the credits for enhanced oil recovery projects and production from marginal wells, (7) repeal of the deduction for tertiary injectants, and (8) excise tax on certain offshore oil and gas production.
1. Repeal Expensing of Intangible Drilling Costs
Generally, a taxpayer who pays or incurs intangible drilling costs (“IDCs”) in the development of an oil or gas property located in the United States may elect under current law either to expense or to capitalize and amortize those costs, if the taxpayer holds a working or other operating interest in such property. The rule is an exception to the general rules requiring taxpayers to capitalize costs that provide a benefit to the taxpayer in future periods.
If a taxpayer elects to expense IDCs, the amount of the IDCs is deductible as an expense in the taxable year the cost is paid or incurred. In the case of an integrated oil company that has elected to expense IDCs, 30% of the IDCs on productive wells must be capitalized and amortized over a 60-month period. Further, a taxpayer may elect to capitalize and amortize certain IDCs over a 60-month period beginning with the month the expenditure was paid or incurred.
The Administration proposes to repeal the election to expense IDCs, as well as the election to amortize IDCs over a 60-month period. Under the proposal, all IDCs would be capitalized and amortized as depreciable or depletable property, depending on the nature of the cost incurred, in accordance with generally applicable rules. The proposal would be effective for costs paid or incurred after December 31, 2010.
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IRS Circular 230 Disclaimer: To ensure compliance with requirements imposed by the IRS, we inform you that any U.S. federal tax advice contained in this communication (including any attachments) is not intended or written to be used, and cannot be used, for the purpose of (i) avoiding penalties under the Internal Revenue Code or (ii) promoting, marketing or recommending to another party any transaction or matter addressed herein.
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