OUR THOUGHTS ON:

Pennsylvania Intangible Drilling Cost Update

Energy & Resources

By Jeffrey Wlahofsky

On May 13, I had the unique opportunity along with members of the Pennsylvania Oil & Gas Association (“PIOGA”), the Pennsylvania Institute of Certified Public Accountants (“PICPA”), the Marcellus Shale Coalition (“MSC”) and the American Petroleum Institute (“PA-API”) to meet with the Pennsylvania Department of Revenue in Harrisburg, Pennsylvania. This meeting encompassed pending notices and regulations that the Department of Revenue is contemplating issuing to the oil and gas industry. An area that we spent considerable time discussing was the Pennsylvania Department of Revenue’s treatment of intangible drilling costs incurred by Pennsylvania resident and non-resident individual taxpayers. At the conclusion of the discussions pertaining to intangible drilling costs (“IDC”), the Pennsylvania Department of Revenue indicated that we may not have a resolution to the issues discussed without the assistance of the General Assembly.

On the following day, I had the opportunity to meet with various members of the Pennsylvania Senate and House of Representatives on Capitol Hill to specifically discuss the tax treatment of intangible drilling costs. Much to my surprise and delight, members of the General Assembly were very interested in the aspects of this taxation and requested an additional meeting that day with other members of the Senate and the House. After that meeting the Representatives at the various meetings requested that I draft a whitepaper for the general assembly explaining the treatment of intangible drilling costs for Pennsylvania residents. In addition, as a follow-up request, I also had the honor of drafting the initial legislation related to tax treatment of intangible drilling costs.

I am pleased to report that, even though my draft of the legislation was not utilized, action has been taken by the General Assembly with respect to the issuance of tax law on how these intangible drilling costs shall be reported for Pennsylvania individual income tax purposes.

Following is a summary of the new law:

An individual is required to amortize IDC costs over a ten-year (10) period beginning in the year the costs were incurred or may elect to deduct one-third (1/3) of the IDC costs in the year incurred and amortize the remaining balance over a ten-year (10) period.

Even though my draft legislation was not utilized I am pleased that the industry has guidance effective immediately.

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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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