Domestic Production Tax Deduction - Section 199

The oil and gas industry continues to be in a constant state of change, particularly in our region. Advances in horizontal drilling techniques have made gas extraction in the Marcellus Shale not only cost-effective, but an increasingly attractive investment. The recent $4.3 billion acquisition of Atlas Resources by Chevron is a clear indication that Marcellus Shale development is here to stay in our region. This exploration boon will benefit landowners, drillers and operators, equipment providers, water procurement and treatment providers, and countless other ancillary support businesses and service providers.

While the industry is changing, so are the tax implications of being a part of this development. With the 2008 election of President Obama, uncertainty in the industry was prevalent. The President’s budget proposals and energy policies were largely seen as negative to the industry and its domestic growth opportunities. However, with the Republicans recently obtaining control of the U.S. House of Representatives, the President will likely have difficulty selling proposals to Congress that essentially tax the industry to support and fund alternative energy development.

Although it may be difficult for the President to implement a sweeping federal taxation overhaul affecting the industry, there are still changes on the horizon for which companies and individuals will need to plan. For example, in the early part of the decade, Congress enacted Section 199 of the Internal Revenue Code “Income Attributable to Domestic Production Activities” to incentivize domestic production and manufacturing activities. This favorable statutory allowance is available to oil and gas producers; however, special rules will affect the industry for tax years beginning January 1, 2010. The Section 199 deduction is scheduled to be fully phased in for tax years beginning January 1, 2010 at a rate of 9%; however, Section 199(d)(9) provides that oil and gas activities are limited to a deduction rate of 6%. Not only will oil and gas producers receive a reduced Section 199 benefit, but if the taxpayer is also involved in other qualifying domestic production activities, specific accounting and allocations will be required to properly segregate activities attributable to the 6% and 9% deductions.

Federal and state income taxation of oil and gas activities can be confusing and, at times, difficult to fully understand. Please contact Jason Droske at or any Schneider Downs Tax Advisor to develop a tax-efficient strategy that fits your particular needs.



Schneider Downs provides accountingtax, wealth management, technology and business advisory services through innovative thought leaders who deliver the expertise to meet the individual needs of each client. Our offices are located in Pittsburgh, PA and Columbus, OH. 

This advice is not intended or written to be used for, and it cannot be used for, the purpose of avoiding any federal tax penalties that may be imposed, or for promoting, marketing or recommending to another person, any tax-related matter.

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