The oil and gas industry has recently come under fire from the Obama Administration. Over the past year, the Administration has proposed levying $40 billion in tax increases on the oil and gas industry.
Congress weighed in by proposing cuts to various tax benefits and the repeal of various provisions which are afforded to oil and gas companies under the Tax Code. Among the provisions singled out for repeal was the manufacturing deduction under IRC Section 199 (Domestic Production Activities Deduction). This deduction is similar to percentage depletion in that no additional costs are incurred to obtain the deduction. The repeal of this provision alone would cost the oil and gas industry an estimated $13 billion. In June, the Senate rejected a version of the proposed repeal tax package in a fairly decisive vote of 61-35, giving the oil and gas industry an interim win. However, the Obama Administration remains committed to increasing taxes for the oil and gas industry.
So, while Congress continues to debate these issues, the question remains – is your company doing all it can to maximize the Section 199 deduction?
In general, Section 199 allows manufacturers (including oil and gas producers) to deduct from taxable income an amount equal to 6% of their qualified production activities income. The manufacturing exemption can have the effect of reducing an oil and gas producers overall federal tax rate from 35% to 32.90%. Qualified production activities are defined under IRS regulations and generally include any of the following oil and gas activities:
• Construction activities related to the drilling of oil and gas wells and drilling platforms
Determining which types of activities qualify for the deduction can be challenging and often requires a careful review of the facts and circumstances. Members of the Schneider Downs Natural Resources Team are fully equipped and ready to assist you in reviewing your company’s unique set of circumstances to help you identify the various types of qualifying activities within your company, and to make sure these activities meet the manufacturing exemption criteria in order to help you maximize the tax benefits associated with the production of oil and gas.
Schneider Downs provides accounting, tax, wealth management 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.