R&D Tax Talk — Apache Corporation v. United States and its Impact on the Oil and Gas Industry and Tax Credits

R&D Tax Talk

In this special edition episode of R&D Tax Talk, the landmark case of Apache Corporation v. United States is examined as it relates to the oil and gas industry, section 174 and R&D tax credits. Monique Pham, Nancy Imholte, Ryan Coleman and Jon Roberts provide an overview of the case with valuable insights into the complexities surrounding R&D credits for unconventional oil and gas extraction.

Key Points:

• Apache Corporation is challenging the IRS over disallowed R&D tax credits related to unconventional oil and gas extraction methods.
• The case is likely to set a precedent for how R&D credits are applied in the oil and gas industry under section 174.
• The outcome may impact tax strategies for companies claiming research credits in the energy sector.

Apache Corporation is suing the U.S. government for what it claims are erroneously collected taxes. At the center of the dispute are two things — research credits and the proper treatment of capitalized drilling costs. There are also broader implications for oil and gas companies engaging in R&D activities. If Apache’s claims are upheld, it could set a precedent for similar firms to claim R&D credits for their technological innovations. If it goes against Apache, it may lead to increased scrutiny and stricter guidelines from the IRS regarding what qualifies as R&D in the energy sector.

“This R&D component is still a pretty big factor in intangible drilling costs, especially in longer-term plays in upstream oil and gas companies,” said Roberts. This case will shape the future of R&D credits in the oil and gas industry, calling into play innovative intangible drilling costs against the new 174 rules. The outcome of this case could redefine industry standards.

The IRS’ decision to disallow the full research credit for the mentioned years has pushed the case into the spotlight. The issue of whether every well requires unique characterization and can be classified under R&D costs, hangs in the balance. The impact of new 174 rules on the traditional operations of the industry, the timing of deductions and their ability to capitalize them adds layers to this involved case.

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