In Chief Counsel Advice (CCA) 201235010, the IRS determined that the intangible drilling cost
preference exception may not be used in tax years when the taxpayer has negative alternative minimum taxable income (AMTI).
He further stated, “Most of our drilling programs have benefited up to an 80-90% Intangible Drilling Cost
Write Offs (IDCs) in the first year, along with the IRS Depletion Allowance of 15% gross income tax free.
The reduction in the projected current taxable income and associated current taxes payable is the result of lower commodity prices, higher intangible drilling cost
deductions, the timing of utilization of net operating loss carryforwards, and the benefit of unwinding of certain Canadian commodity hedges.
For successful investments in domestic oil and gas wells by independent oil and gas producers, intangible drilling costs
(wages, expenses of using machinery for grading and drilling, and costs of unsalvageable materials) are fully tax-deductible in the year in which they occur.
Incentives include: tax exemptions; a duty-free import allowance for materials not available in Turkey; depreciation on fixed assets; exemption from VAT, limited to purchase of goods and services for exploration; a depletion allowance, though restricted to capitalised exploration costs, intangible drilling costs
, and costs of dry-holes; the possibility of creating and/or transferring rights in licences and leases, similar to those applied in real property; the right to export 35% of onshore, and 45% of offshore oil production from fields found after January 1980; and deduction of some exploration costs from annual licence rentals.
For areas other than the North Slope, the credits include: 30 percent or 40 percent exploration credits; 20 percent credits for capital expenditures; 40 percent credits for intangible drilling costs
, as defined by the federal tax rules, and seismic projects within the boundaries of a production or an exploration unit; and a 25 percent carried-forward annual loss credit.
Other industry priorities include lifting the federal ban on oil exports, expediting permitting for LNG facilities, and maintaining federal tax policies that have been used effectively to encourage domestic production for over 100 years, including intangible drilling costs
(IDCs) and depletion allowance.
Intangible drilling costs
, the majority of those expenses associated with drilling and completing a well, can be 100% deducted against active income in the year they are incurred.
Analysts say it is still not clear if companies can expense their intangible drilling costs
, which could affect their cash flow depending on any legislative changes.
And so it goes with each piece of the puzzle that constitutes so-called oil industry subsidies - from the Section 617 deduction for Intangible Drilling Costs
to foreign tax credits, refinery expensing options, and geological amortization subsidies.
Section 263 of the Internal Revenue Code permits integrated oil companies such as Exxon and Chevron to immediately deduct 70 percent of intangible drilling costs
In late February, his administration proposed a new 2010 budget that would eliminate tax breaks on intangible drilling costs
such as fuel, labour and repair costs, which help attract capital to high-risk oil and gas drilling.