So, for the oil and natural gas industry, what is the impact of the new tax bill just passed by congress? As for most other American businesses, the bill is a mixed bag of lowered tax rates and limited deductions, but at the end of the day, it appears to be a net positive.
- Tax Rates are lowered – This one’s rather obvious. Lowering the corporate rate from 35% to 21%, and lowering all personal marginal rates will clearly benefit everyone involved in the oil and gas industry from a tax standpoint. Not much more needs to be said there.
- The option to expense Intangible Drilling Costs is retained – This century-old tax treatment was the number one issue for the upstream independents who produce the lion’s share of oil and gas in the U.S. today. The industry’s lobby and upstream trade associations have worked overtime for the last eight years to educate members of congress about how critical this tax provision is to the ability of this very capital-intensive industry to raise the capital necessary to keep drilling. Those efforts paid off in the end, as this key provision was retained in the final bill.
- A new provision allows the expensing of some additional capital investments – The bill allows businesses to expense the full cost of new investments in certain plant and equipment for the next five years, and then gradually phases this provision out. This will benefit many in the upstream, midstream and downstream sectors of the oil and gas industry.
- Percentage Depletion deduction is retained – Another century-old tax treatment, this one is important to small independents and royalty owners.
- Corporate Alternative Minimum Tax (AMT) is repealed – No one in the oil and gas industry or any other business sector will mourn the passing of this provision, which has served mainly to penalize marginally profitable corporations for decades. This repeal is a real positive development for rapidly expanding midstream companies as well as many upstream producers.