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2011 Proposed Budget could cost the Energy Companies Billions
Obama's proposed FYE 2011 budget could cost energy companies billions of dollars by eliminating the industry’s preferences and tax loopholes. The budget proposal would include potentially detrimental disincentives for all oil and gas, offshore and coal companies.
Similar proposals were made by the administration for the fiscal year 2010 and the result was a dead-end journey. However, Obama intends on continuing his pursuit of the energy sector as a follow up to his promise to the other world leaders at the G20 economic summit held here in Pittsburgh last year. His goal is to transition to a 21st century clean-energy economy rather than an economy that is dependent on fossil fuel subsidies.
Following are some of the energy tax incentives that he proposes to repeal effective for the tax years beginning after December 31, 2010.
- Expensing of intangible drilling costs and 60 month amortization of capitalized intangible drilling costs
- Expensing and 60 month amortization of exploration and development costs related to coal and other hard mineral fossil fuels.
- Exception from passive loss activity rules for working interests in oil and natural gas properties. Repealing this exclusion would make it more difficult for small and medium sized companies to attract investors and to obtain the capital needed to fund exploration costs.
- Production tax credit for oil and natural gas from marginal wells
- 15% investment tax credit for enhanced oil recovery projects
- Percentage depletion deduction for the capital costs of oil and natural gas wells, coal, and other hard mineral fossil fuels. This result would be the elimination of a $10 billion tax break over the next decade if Obama’s proposal to for repeal is enacted.
- The biggest single provision - repeal of the Code Section 199 Domestic Manufacturing Deduction for oil and natural gas production, coal and other hard mineral fossil fuels. This provision is valued at $17.3 billion from 2011 to 2020. This however would still be made available to other US industries.
- Repeal of the 24 month amortization of geological and geophysical costs. Instead proposing an amortization period of 7 years for the costs incurred for oil and gas exploration in the U.S.
The oil and gas provisions total $36.5 billion over the next decade. The elimination of the tax preferences for the coal producers in that industry total about $2.3 billion. All together these total $38.8 billion over 10 years in tax repeal for the oil, natural gas, and coal industries.
In addition, the oil and gas companies would also face $1.15 billion in new fees.
One such fee would be imposed upon oil and gas companies as an incentive to get their leases into production or relinquish them. The penalty is $4/acre for 'non-producing' leases on land and waters administered by the Interior Department's Bureau of Land Management and Minerals Management Services.
The budget proposal abandons an excise tax on Gulf of Mexico oil and gas production that Obama proposed last year to close a loophole in leases issued in 1998 and 1999. The faulty leases have had the effect of letting oil companies produce oil and gas without paying royalties.
Certainly if enacted, these repeals would place excessive limits on exploring and drilling of oil and natural gas wells, coal, and other hard mineral fossil fuels, for the companies as well as the investors.
For more information on the energy tax incentives and what the proposed budget could mean for your organization, please contact:
Celeste M. Suchko, CPATax Shareholder |
Emanuel V. DiNatale, CPA, MSTax Shareholder |
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