The Biden administration has proposed to repeal a number of tax provisions that encourage direct investment in oil and gas properties as a way to offset the costs of extending and expanding clean energy tax provisions. The administration has proposed to repeal 13 oil and gas tax incentives as well as several general tax provisions that affect oil and gas investors. The Biden administration issued the proposals as part of its recently released Green Book, which explains the administration’s corporate and individual tax proposals for its fiscal year 2022 budget.
Most proposals will be effective for tax years beginning after December 31, 2021.
The Biden administration proposes to repeal the option to expense, rather than capitalize, intangible drilling costs (IDCs), which include expenditures made for drilling and preparing domestic wells for oil and natural gas production that cannot be recovered. The deduction of IDCs is one of the largest tax incentives for oil companies, as IDCs are estimated to be about 60-80 percent of the cost of a well.
The administration also proposes to repeal the allowance to use the percentage depletion method to recover the capital costs of oil and natural gas wells. Oil and gas investors are currently allowed to use the greater of cost depletion or percentage depletion. Percentage depletion is computed without regard to the taxpayer’s basis in the depletable property, allowing a company to continue to claim percentage depletion after all the expenditures incurred to acquire and develop the property have been recovered.
The third major oil and gas tax proposals is to repeal the exception to passive loss limitation rules for oil and gas investors that hold the working interest in an entity that does not limit the taxpayer’s liability with respect to the interest. This exception currently allows investors to use passive losses from working interests to offset wages and active income.
The international tax proposals in the Green Book include a proposal to repeal the exemption of foreign oil and gas extraction income from the U.S. global intangible low-taxed income (GILTI).
The Biden administration has also proposed to tax long-term capital gains and qualified dividend income at ordinary rates, rather than at lower capital gains rates, for individuals with an adjusted gross income of more than $1 million. The administration also proposed that the rate increase would apply to “gains required to be recognized after the date of announcement,” which is April 28, 2021, the date when President Biden introduced the American Families Plan.
The administration proposes to subject all pass-through business income of high-income taxpayers to either the 3.8 percent net investment income tax (NIIT) or self-employment tax. Taxpayers with adjusted gross income in excess of $400,000 would be subject to the NIIT on the gross income and gain from any trades or businesses that is not otherwise subject to employment taxes. Limited partners and LLC members who provide services and materially participate in their partnerships and LLCs, and S corporation owners who materially participate in the trade or business, would be subject to self-employment tax on their distributive shares of income above certain threshold amounts.
The administration would also tax a partner’s share of carried interest income in an investment partnership as ordinary income. This would apply to partner’s with taxable income from all sources of more than $400,000, and partners in such investment partnerships would also have to pay self-employment taxes on the income.
The Biden administration has proposed to repeal the following:
The repeal of any oil and gas tax incentives will likely be part of broader tax legislation that may take months to negotiate. Weaver will monitor these negotiations and report on developments as they arise. Please contact us with any questions about how these tax provisions may affect your business.
© 2021