NSWA UPDATE - May 6, 2013 Joint Committee on Taxation Report
The Joint Committee On Taxation report, released May 6, 2013, gives an overview of the federal tax provisions in the 11 areas that the Ways and Means working groups focused on, along with a short synopsis of the comments the working groups received.
Like the working groups themselves, the report does not make any recommendations to the full Ways and Means Committee on how they should implement tax reform. We don’t think this process will end up being used to write a bill – from everything we’ve heard, it was more a process to get members of the committee up to speed and working together in a bipartisan way; meanwhile Chairman Camp has continued developing his own tax reform package. But it is important that we got our submission and position into the document for the fight that could come up down the road. Camp is expected to release his bill, HR 1, sometime before the August recess.
The section on tax provisions relating to extraction and production for energy activities is on pages 149-154.
Depletion (secs. 611-613A and 291)
Depletion is available to any person having an economic interest in a producing mine or oil and gas property. There generally are two types of depletion - cost and percentage depletion.
Under the cost depletion method, the taxpayer deducts that portion of the adjusted basis of the depletable property which is equal to the ratio of units sold from that property during the taxable year relative to the number of units remaining as of the end of taxable year plus the number of units sold during the taxable year.
Under the percentage depletion method, a percentage, varying from five percent to 22 percent (generally 15 percent for oil and gas properties), of the taxpayer’s gross income from a producing property is allowed as a deduction in each taxable year. The amount deducted generally may not exceed 50 percent (100 percent in the case of oil and gas properties) of the net income from the oil and gas property in any year (the “net-income limitation”).
Additionally, the percentage depletion deduction for all oil and gas properties may not exceed 65 percent of the taxpayer’s overall taxable income for the year (determined before such deduction and adjusted for certain loss carrybacks and trust distributions).
Cost depletion is limited to the taxpayer’s basis in the property, whereas percentage depletion is not limited by the basis, but is subject to limitations based on net income derived from the property and taxable income.
Percentage depletion for producing oil and gas property (15 percent rate) is available only to independent producers and royalty owners. Integrated oil and gas companies must use cost depletion.544 Generally, an integrated oil company is a producer of crude oil that engages in the refining or retail sale of petroleum products in excess of certain threshold amounts.
Percentage depletion is also available for coal and lignite (10 percent rate)545 and oil shale (15 percent rate).546 The percentage depletion deduction for coal and lignite is generally reduced for corporations by an amount equal to 20 percent of the percentage depletion that exceeds the adjusted basis of the property.
Election to expense intangible drilling costs (secs. 263(c) and 291)
Taxpayers may elect to currently deduct intangible drilling costs (“IDCs”) paid or incurred with respect to the development of an oil or gas property located in the United States.
For an integrated oil company that has elected to expense IDCs, 30 percent of the IDCs on productive wells must be capitalized and amortized over a 60-month period. Generally, an integrated oil company is a producer of crude oil that engages in the refining or retail sale of petroleum products in excess of certain threshold amounts.
The summary of the Energy Working group’s findings are on pages 505-508.
“Comments submitted to the Energy Working Group include both broad and narrow proposals. The broad proposals include suggestions to eliminate all energy tax expenditures and adopt the Fair Tax or finance tax reform by imposing a carbon tax. Some slightly more narrow comments call for eliminating all tax expenditures benefiting renewable technologies or replacing them with a technology neutral approach. Other broad but sector specific proposals call for eliminating all tax expenditures relating to oil and gas extraction and production.
Many comments, however, relate to specific Code sections and are summarized below.
Extraction and production
Deduction for intangible drilling costs (“IDCs”) (secs. 263(c) and 291): A number of comments suggest retaining present law with respect to the recovery of IDCs….
Percentage depletion deduction (sec. 613): Some comments suggest keeping percentage depletion…
Oil and gas extraction and production (secs. 43, 179C, 167(h), 199, 263(c), 291, 472, and 613): Some comments call for eliminating tax expenditures benefiting oil and gas extraction and production, including those listed above.