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  • Energy Tax Facts
  • 29 Aug 17

Capital Recovery Critical to Supporting Small Businesses behind Energy Development

A simple tax rate cut appears smart on first glance, but for critical energy development the issue is far more complex. Historic tax provisions in the tax code like the Intangible Drilling Costs and percentage depletion deductions are critical to how this industry, like many others with high upfront costs, manages its capital budgets and invests in the future. It’s time for tax reform efforts to reexamine the role of these capital recovery mechanisms to any successful tax adjustment, or risk losing the jobs and small businesses that leaders in Washington so vocally wish to support.

POLITICO recently published an article on the state of tax reform today, highlighting efforts by the “Big 6” to tackle individual and corporate tax cuts. Much remains to be seen on what will or will not find united agreement, but according to the story, “the corporate rate will likely fall to somewhere between 22 percent and 25 percent, depending on which deductions or breaks lawmakers are willing to scale back or eliminate.”

While looking at the corporate tax rate is an important effort, the issue of how capital is formed and recovered is key to the operation of many industries – industries that in turn support jobs and wages across the country. As IPAA recently summarized in comments to the Senate Finance Committee:

“As sound as the benefits of lower tax rates are, for industries like American oil and natural gas production that [are] driven by recovering capital and reinvesting it in America, no likely lower tax rate that can be developed in tax reform would offset the loss of the capital recovery provisions that have so effectively encouraged American production.”

For U.S. independent oil and gas companies, this ability to recover the high capital costs of developing our nation’s energy resources is critical to ensuring future investment in production in the years ahead.

Oil and natural gas producers are just one of many industries that rely on these types of tax provisions to afford investing in new operations, technology, and development. The Intangible Drilling Costs deduction, for instance, is similar to tax deductions available to many industries from farmers for equipment, technology companies for research and development, and even things like restaurants and bakeries for raw materials and labor costs. These are all upfront costs by small business owners with no guaranteed return on investment.

Many of these companies are the same small- and mid-sized businesses that tax reform is supposed to support, with the average IPAA member company employing only 12 full-time and 2 part-time workers. For these smaller producers, the percentage depletion deduction is critical to future investment and operation of America’s oil and natural gas wells. Vital tax deductions – not government handouts – help drive these businesses forward. Vital tax deductions – not government handouts – help drive these business forward.

POLITICO reports the Trump administration is pushing the benefits of tax reform to help “the middle class and average families and help to keep jobs in the U.S.” Doing this also means understanding the industries that support these individuals, be it from providing well-paying American jobs to supplying reliable, affordable, home-grown energy for consumers from the gas station to the kitchen stove.

IPAA will continue to be a voice in the tax debate in months ahead, advocating for common sense actions that support our workforce, not simply reform for reform’s sake.