Credits Returned from the Grave - "Enhanced Oil Recovery Credit"

Energy & Resources|Internal Revenue Service|Tax

By Tom Schneider

The 2016 tax year will be an historic one for the Energy and Natural Resources industry with the return of the Enhanced Oil Recovery (EOR) Credit.  This credit has been phased out completely for the past 10 tax years due to the average domestic first purchase price (reference price) per barrel of oil being too high.

In accordance with Internal Revenue Service Notice 2016-44, the reference price per barrel of oil for the 2015 calendar year was $44.39.  That amount did not exceed $28 multiplied by the inflation adjustment factor (IAF) of 1.6464 ($46.10) for 2015.  Therefore, there is no phase-out of the EOR credit for qualified costs paid or incurred in tax years beginning in calendar year 2016.

Qualified Enhanced Oil Recovery Costs

The enhanced oil recovery credit is equal to 15% of the taxpayer’s qualified enhanced oil recovery costs for the tax year.  “Qualified enhanced oil recovery costs” means any of the following:

  • An amount paid or incurred during the tax year for tangible property: (1) that is an integral part of a qualified enhanced oil recovery project; and (2) with respect to which depreciation or amortization is allowable.
  • Any intangible drilling and development costs: (1) that are paid or incurred in connection with a qualified enhanced oil recovery project; and (2) with respect to which the taxpayer makes an election under Section 263(c) for the tax year.
  • Any qualified tertiary injectant expenses that are paid or incurred in connection with a qualified enhanced oil recovery project and for which a deduction is allowable for the tax year.
  • Any amount that is paid or incurred during the tax year to construct a gas treatment plant that (1) is located in the area of the United States lying north of 64 degrees north latitude; (2) prepares Alaska natural gas for transportation through a pipeline with a capacity of at least 2 trillion Btu of natural gas per day; and (3) produces carbon dioxide which is injected into hydrocarbon-bearing geological formations.

The Internal Revenue Service plans to issue a revised Form 8830, Enhanced Oil Recovery Credit, for filing with tax returns for tax years beginning in 2016; however, to date, no revision has been posted to the Service’s website.  Pass-through entities should pass the information for the credit to their partners/shareholders via Schedule K-1 to be claimed on individual tax returns.

It is the Internal Revenue Service’s intention, during March of 2017, to determine if the credit will be available for tax years beginning in 2017.

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As a follow up, the IRS has released the new Form 8830, updated for the 2016 tax year.  It can be found here: https://www.irs.gov/pub/irs-pdf/f8830.pdf

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