Tax Considerations for Oil and Gas in a Low Price Environment

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Rob Myatt | Oilman Magazine

The COVID-19 pandemic has put many oil and gas companies in financially difficult positions. In response to low oil prices and a decline in earnings, oil and gas companies should understand several tax provisions that could help them increase liquidity by producing a tax refund, reducing tax liability or deferring certain tax payments. This includes new tax changes in the CARES Act as well as several established tax provisions that companies can often overlook.

Deductions

Several tax provisions can help oil and gas companies offset prior tax periods and increase deductions.

NOL Carryback: The CARES Act includes a number of tax changes that can help oil and gas companies reduce their tax liability and possibly generate a tax refund. A key provision is the reinstatement of the net operating loss (NOL) carryback under IRC Section 172(a). Companies can now carry back NOLs incurred in 2018, 2019 and 2020 for up to five years and offset up to 100 percent of taxable income for the years to which the carryback is applied. 

Business interest deduction: The CARES Act increased the adjusted taxable income portion of the business interest deduction limitation under IRC Section 163(j) from 30 to 50 percent for taxable years 2019 and 2020; this is limited to 2020 for partnerships. The Act also allows businesses to use their taxable income from 2019 (rather than 2020) in tax year 2020 for purposes of applying the 50 percent limitation. The increased limits for the business interest deduction is especially helpful for oil and gas companies with extensive debt financing.

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