Income Tax Update for Oil and Gas Industry

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Agenda: Legislative Update; IRS Hot Topics; Energy News; Earnings in Perspective by API; Production Tax Credit; Taxpayer Relief Act.

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Income Tax Update for Oil and Gas Industry

  1. 1. FEDERAL INCOME TAX UPDATE FORTHE OIL AND GAS INDUSTRYDuane Snyder, CPA, Tax PartnerFebruary 22, 2013
  2. 2. Federal Income Tax Update for the Oil and GasIndustry• Legislative Update – – What tax incentives were targeted by the Obama administration and where it stands now – Extension of Renewable Energy Tax Credits• IRS Hot Topics – Depletion Calculation – G&G – DPAD © 2011 Hein & Associates, LLP. All rights reserved.
  3. 3. The Power to Tax “The power to tax carries with it the power to embarrass and destroy.”Willis Van Devanter, Associate Justice of the UnitedStates Supreme Court, January 3, 1911 to June 2, 1937. © 2011 Hein & Associates, LLP. All rights reserved.
  4. 4. Energy News• Last year, the three biggest U.S. oil companies took home more than $80 billion in profit• This has drawn criticism from lawmakers who claim “existing tax “loopholes and expenditures” for the oil and natural gas companies amount to an unwarranted “preference” of these industries over others.”By Roger Runningen, 3/29/12 Bloomberg News © 2011 Hein & Associates, LLP. All rights reserved.
  5. 5. Energy NewsBloomberg NewsRecord profit eludes Big Oil as costsoutpace Brent GainThe world’s biggest oil companies are failing to convertthe highest Brent crude prices ever into record profitsas production costs climb and U.S. natural gas priceslanguish- 1/30/13 Bloomberg News © 2011 Hein & Associates, LLP. All rights reserved.
  6. 6. Obama Administration StillTargeting Oil and Gas IndustryBloomberg NewsObama Says Oil Profits Justify EndingU.S. Tax Breaks• Last year, the three biggest U.S. oil companies took home more than $80 billion in profit• This has drawn criticism from lawmakers who claim “existing tax “loopholes and expenditures” for the oil and natural gas companies amount to an unwarranted “preference” of these industries over others.”By Roger Runningen, 3/29/12 Bloomberg News © 2011 Hein & Associates, LLP. All rights reserved.
  7. 7. Obama Administration StillTargeting Oil and Gas IndustryBloomberg NewsObama Says Oil Profits Justify EndingU.S. Tax Breaks• President Barack Obama said oil company profits justify abolishing $4 billion in annual oil and natural gas subsidies and shifting those savings to research on clean-energy fuels.• Ending such breaks would reduce the deficit by $41 billion over a decade, according to Obama’s budget for fiscal 2013.By Roger Runningen, 3/29/12 Bloomberg News © 2011 Hein & Associates, LLP. All rights reserved.
  8. 8. Earnings in Perspective by API http://www.api.org/oil-and-natural-gas-overview/industry-economics/earnings-in-perspective.aspx © 2011 Hein & Associates, LLP. All rights reserved.
  9. 9. Earnings in Perspective by API http://www.api.org/oil-and-natural-gas-overview/industry-economics/earnings-in-perspective.aspx © 2011 Hein & Associates, LLP. All rights reserved.
  10. 10. Earnings in Perspective by API http://www.api.org/oil-and-natural-gas-overview/industry-economics/earnings-in-perspective.aspx © 2011 Hein & Associates, LLP. All rights reserved.
  11. 11. Earnings in Perspective by API http://www.api.org/oil-and-natural-gas-overview/industry-economics/earnings-in-perspective.aspx © 2011 Hein & Associates, LLP. All rights reserved.
  12. 12. Earnings in Perspective by API http://www.api.org/oil-and-natural-gas-overview/industry-economics/earnings-in-perspective.aspx © 2011 Hein & Associates, LLP. All rights reserved.
  13. 13. Oil and Gas Industry Targets of the ObamaAdministrationExamples of Targeted Oil and Gas TaxBenefits • Domestic Production Activities Deduction (Sec. 199) • Repeal expensing of intangible drilling costs • Repeal percentage depletion • Repeal expensing of tertiary injection costs • Foreign tax credit limitation © 2011 Hein & Associates, LLP. All rights reserved.
  14. 14. Example of 2012 Failed AttemptsSection 199 Deduction• 9% “Phantom Deduction” for domestic manufacturing and production activities• Oil and Gas companies limited to 6% © 2011 Hein & Associates, LLP. All rights reserved.
  15. 15. Example of 2012 Failed AttemptsIntangible Drilling and DevelopmentDeductions• 100 percent deduction available for independent producers• 70 percent deduction available for integrated oil companies• 30 percent is amortized over 7 years for integrated oil companies• Alternative Minimum Tax treatment often limits these deductions © 2011 Hein & Associates, LLP. All rights reserved.
  16. 16. Example of 2012 Failed AttemptsGeological and Geophysical Deductions• Prior to 2005, Deduction allowed through depletion, if successful or in year abandoned• After 2004, deduction is over 24 months – 6 months in Year 1 – 12 months in Year 2 – 6 months in Year 3• In 2007, this was changed to 7 years for the largest integrated oil and natural gas producers © 2011 Hein & Associates, LLP. All rights reserved.
  17. 17. Example of 2012 Failed AttemptsPercentage Depletion Deduction• The percentage depletion allowance may only be taken by independent producers and royalty owners and not by integrated oil companies.• Depletion may only be claimed up to specific daily American production levels of 1,000 barrels of oil or 6,000 mcf of natural gas.• Deduction is limited to 65% of net taxable income.• The net income limitation requires percentage depletion to be calculated on a property-by-property basis and prohibits percentage depletion to the extent it exceeds the net income from a particular property. © 2011 Hein & Associates, LLP. All rights reserved.
  18. 18. January 30, 2013 White House Press Briefing Jay Carney, White House Press Secretary © 2011 Hein & Associates, LLP. All rights reserved.
  19. 19. Production Tax Credit for Renewable EnergyOld Law:• Production tax credit was available for wind energy facilities placed in service prior to 2013 (2014 for other forms of renewable energy)• Investment tax credit in lieu of the production tax credit © 2011 Hein & Associates, LLP. All rights reserved.
  20. 20. Production Tax Credit for Renewable Energy• On January 2, 2013, Congress temporarily extended the PTC for wind as part of the fiscal cliff bill. The bill also includes an important new provision that allows wind and other eligible renewable energy projects that begin construction in 2013 to qualify for the credit. Previous law required eligible projects to be in-service and operating by the end of the calendar year when the credit was set to expire.• The bill also allows wind and other eligible renewable energy sources to qualify for a 30 percent investment tax credit in lieu of the PTC © 2011 Hein & Associates, LLP. All rights reserved.
  21. 21. Taxpayer Relief Act of 2012Individual Tax Provisions:• Retains the 2012 tax rates for taxpayers earning less than $450,000 for joint filers and surviving spouses, $425,000 for head of household filers, $400,000 for single filers and $225,000 for married filing separate filers. Tax rates for these individuals were set to increase prior to the passing of the 2012 Taxpayer Relief Act.• Increases the top tax rate to 39.6% for individuals exceeding the thresholds mentioned above.• Increases the long-term capital gain and dividend tax rates to 20% for taxpayers with incomes exceeding the thresholds above (so a 23.8% rate applies in 2013 to higher income individuals, counting the 3.8% Medicare Contribution Tax from the Health Care Act).• Provides permanent AMT relief by increasing the exemption amounts to $50,600 for single filers, $78,750 for joint filers and $39,375 for married persons filing separately, to be indexed for inflation after 2012. © 2011 Hein & Associates, LLP. All rights reserved.
  22. 22. Taxpayer Relief Act of 2012Individual Tax Provisions:• Reinstates the personal exemption phase-out for taxpayers earning more than $300,000 for joint filers and surviving spouses, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separate filers.• Reinstates itemized deduction limitations, called the “Pease Limitation” for higher income taxpayers. The limitation applies to taxpayers with income of more than $300,000 for joint filers and surviving spouses, $275,000 for head of household filers, $250,000 for single filers and $150,000 for married filing separate filers. Taxpayers subject to the limitation will have their total itemized deductions reduced by 3% of the amount by which their AGI exceeds the threshold amount. However, the reduction cannot exceed 80% of the amount of otherwise allowable itemized deductions. © 2011 Hein & Associates, LLP. All rights reserved.
  23. 23. IRS Hot TopicsDepletion Deduction• Unit of Property - Depletion to be calculated on a property-by-property basis and prohibits percentage depletion to the extent it exceeds the net income from a particular property. – Industry norm is to calculate at well level• Reserves – SEC Reserves and 105% safe harbor• Cost depletion > 50% of Net Income, expect IRS to review• Cost per barrel excessive, expect IRS to review © 2011 Hein & Associates, LLP. All rights reserved.
  24. 24. IRS Hot TopicsCost Depletion – RecoverableReserves – 1/13/97• Safe Harbor Election provided by Revenue Procedure 2004-19• ELECTIVE safe harbor that the owner of domestic oil and/or gas properties may use in determining the property’s recoverable reserves for purposes of computing cost depletion under § 611 of the Internal Revenue Code.• Taxpayer’s estimate of an oil and/or gas property’s total recoverable units is equal to 105 percent of the property’s proved reserves as defined in the Security and Exchange Commission Regulations (17 C.F.R. section 210.4-10(a) of Regulation S-X) remaining as of the taxable year. © 2011 Hein & Associates, LLP. All rights reserved.
  25. 25. Unit of Property Example © 2011 Hein & Associates, LLP. All rights reserved.
  26. 26. IRS Hot TopicsG&G Costs• Expect the IRS to analysis operating expenses for items that should have been included as G&G © 2011 Hein & Associates, LLP. All rights reserved.
  27. 27. Questions? Duane Snyder, CPA, Tax Partner 972-458-2296 dsnyder@heincpa.com www.heincpa.com

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