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TAX ISSUES
Tax Policy and Energy Policy Work Together
The Tax Code Impacts America’s Energy Production. Currently, the federal tax code recognizes the concepts of
capital formation and capital recovery which encourage investment in capital-intensive American industries—like oil
and natural gas production – to ensure the United States has a stable, American energy supply and a vibrant
manufacturing base.
The Tax Code Works for American Energy. Federal oil and natural gas tax policy is working and has resulted in an
increasing amount of American oil and natural gas development which, in return, has decreased the United States’
reliance on imported sources of energy for the first time in decades.
Potential for Less American Production. Any tax reform proposal that eliminates the current treatment of key
independent producer tax provisions could result in fewer wells drilled, and the premature termination of existing wells,
in the United States – making America more reliant on foreign energy.
Business Deductions for America’s Independent Producers Are Not Subsidies
Deducting Expenses and Receiving Subsidies are Different. Generally, the U.S. tax code taxes businesses on net
income. This means businesses, across sectors of the economy, are taxed on earnings after the costs of doing business
(expenses) are deducted. Conversely, subsidies are either targeted reductions of taxes owed or direct payments from the
government.
Drilling Costs Expensing. Independent producers may immediately expense those intangible drilling costs (IDC)
associated with drilling for natural gas and oil that have no salvage value. IDC are 65 to 80 percent of the capital
expenditure budget of independent producers and eliminating this provision will decrease American jobs and production.
Percentage Depletion. All mineral natural resources are eligible for a Percentage Depletion income tax deduction to
reflect the decreasing value of the resource as it is produced. Percentage Depletion allows independent producers to
reinvest cash into the maintenance and operational expenses of existing wells and redeploy capital to drill new wells. Oil
and natural gas Percentage Depletion is highly limited and only applies to smaller independent producers and to royalty
owners.
Passive Loss Exception for Working Interests. The tax code enables working interest owners in oil and natural gas
production to achieve some parity between their investments and those of corporate shareholders. Counting any working
interest investment losses as active instead of passive, allows individual investors to treat the normal business deductions
from their investment in the same way as corporations.
Tax Reform That Impedes American Natural Gas and Oil Production is Bad Policy.
Congress faces a key question—it can either promote or impede oil and natural gas development in the United States.
Maintaining oil and natural gas tax provisions is critical to American development.
Reprinted by permission of IPAA.