Biden Administration Proposes Repeal of Tax Preferences for Oil and Gas Industry
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The Biden administration has proposed to repeal a number of tax provisions that encourage direct investment in oil and gas properties as a way to offset the costs of extending and expanding clean energy tax provisions. The administration has proposed to repeal 13 oil and gas tax incentives as well as several general tax provisions that affect oil and gas investors. The Biden administration issued the proposals as part of its recently released Green Book, which explains the administration’s corporate and individual tax proposals for its fiscal year 2022 budget.
Most proposals will be effective for tax years beginning after December 31, 2021.
Repeal Intangible Drilling Costs
The Biden administration proposes to repeal the option to expense, rather than capitalize, intangible drilling costs (IDCs), which include expenditures made for drilling and preparing domestic wells for oil and natural gas production that cannot be recovered. The deduction of IDCs is one of the largest tax incentives for oil companies, as IDCs are estimated to be about 60-80 percent of the cost of a well.
Repeal Percentage Depletion for Oil and Gas Wells
The administration also proposes to repeal the allowance to use the percentage depletion method to recover the capital costs of oil and natural gas wells. Oil and gas investors are currently allowed to use the greater of cost depletion or percentage depletion. Percentage depletion is computed without regard to the taxpayer’s basis in the depletable property, allowing a company to continue to claim percentage depletion after all the expenditures incurred to acquire and develop the property have been recovered.
Eliminate Oil and Gas Exception to the Passive Loss Limitations
The third major oil and gas tax proposals is to repeal the exception to passive loss limitation rules for oil and gas investors that hold the working interest in an entity that does not limit the taxpayer’s liability with respect to the interest. This exception currently allows investors to use passive losses from working interests to offset wages and active income.
Subject Foreign “Extraction Income” to GILTI
The international tax proposals in the Green Book include a proposal to repeal the exemption of foreign oil and gas extraction income from the U.S. global intangible low-taxed income (GILTI).
Tax Capital Gains at Ordinary Income Rates
The Biden administration has also proposed to tax long-term capital gains and qualified dividend income at ordinary rates, rather than at lower capital gains rates, for individuals with an adjusted gross income of more than $1 million. The administration also proposed that the rate increase would apply to “gains required to be recognized after the date of announcement,” which is April 28, 2021, the date when President Biden introduced the American Families Plan.
Subject Pass-Through Income to the 3.8% NIIT or Self-Employment Tax
The administration proposes to subject all pass-through business income of high-income taxpayers to either the 3.8 percent net investment income tax (NIIT) or self-employment tax. Taxpayers with adjusted gross income in excess of $400,000 would be subject to the NIIT on the gross income and gain from any trades or businesses that is not otherwise subject to employment taxes. Limited partners and LLC members who provide services and materially participate in their partnerships and LLCs, and S corporation owners who materially participate in the trade or business, would be subject to self-employment tax on their distributive shares of income above certain threshold amounts.
Tax Carried Interest as Ordinary Income and Subject it to Self-Employment Tax
The administration would also tax a partner’s share of carried interest income in an investment partnership as ordinary income. This would apply to partner’s with taxable income from all sources of more than $400,000, and partners in such investment partnerships would also have to pay self-employment taxes on the income.
Proposed Repeal of 13 Oil and Gas Tax Incentives
The Biden administration has proposed to repeal the following:
- The enhanced oil recovery credit;
- The credit for oil and natural gas produced from marginal wells;
- Expensing of intangible drilling costs;
- The deduction of costs paid or incurred for any tertiary injectant used as part of tertiary recovery method;
- The exception to passive loss limitations provided to working interests in oil and natural gas properties;
- The use of percentage depletion with respect to oil and natural gas wells;
- The two-year amortization of independent producers’ geological and geophysical expenditures;
- The expensing of exploration and development costs;
- The percentage depletion for hard mineral fossil fuels;
- Capital gains treatment for coal or lignite royalties;
- The exemption from the corporate income tax for fossil fuel publicly traded partnerships;
- The oil Spill Liability Trust Fund (OSTLF) excise tax exemption for crude oil derived from bitumen and kerogen-rich rock; and
- The amortization of Air Pollution Control Facilities.
The repeal of any oil and gas tax incentives will likely be part of broader tax legislation that may take months to negotiate. Weaver will monitor these negotiations and report on developments as they arise. Please contact us with any questions about how these tax provisions may affect your business.
© 2021