The expansion of natural gas drilling in the Marcellus Shale regions of Pennsylvania has not only caught the attention of conservationists and environmentalists both in the private sector and in state government, but also in the Pennsylvania Department of Revenue (“DOR”). Charged with the responsibility of collecting revenue properly due the Commonwealth, the DOR has been taking a hard look at taxpayer returns reporting expenses connected with drilling and development of oil and natural gas wells.
In that regard, the DOR has been taking a close look at partnership, S corporation and individual income tax returns on which deductions were claimed for intangible drilling costs (“IDC”). In general, IDCs are expenses that have no salvage value such as wages, ground clearing, drainage control, road construction, surveying, drilling, fracking and numerous other similar costs incurred in drilling a well. Although IDCs are deductible when incurred for federal income tax purposes, if the proper election has been made, the Department of Revenue’s position essentially would require taxpayers to capitalize and amortize such costs over the productive life of each well. In December 2010, the Department of Revenue released a draft version of PIT Bulletin 2010-04, setting further Pennsylvania methods of accounting for oil and gas exploration and development costs and IDCs. We have been advised that the draft has been withdrawn. The treatment of IDC’s for Pennsylvania purposes remains an ongoing issue.
Schneider Downs has the experience and industry related expertise necessary to provide guidance and develop a plan that maximizes your after-tax return on deductions claimed for intangible drilling costs. To learn more about potential favorable tax outcomes for taxpayers involved in drilling and development of oil and natural gas wells, contact a trusted Schneider Downs advisor today.
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