Tax Advice for Oil & Gas

This edition provides tax considerations for reducing oil and gas taxes with the help of Andy Hall, tax manager at Weaver based in Fort Worth, TX. This industry is heavy with fixed and intangible assets, and development, operating and disposal costs. Federal and state tax codes provide a plethora of deductions and tax treatments for all this activity.

It is easy to miss an opportunity to save on taxes while navigating the related sea of tax code. My takeaway from speaking with Andy was that success depends on two factors: (1) hiring great tax specialists, and (2) keeping very detailed and reliable financial records.

Question 1: Are there any new regulations for the 2023 income tax filing that oil & gas companies should be aware of?

Andy: The biggest change this year is that equipment placed in service on January 1, 2023 and later can no longer take 100% bonus depreciation. This has been scaled back to an 80% deduction for the first year. This reduces total business expense and increases taxable income.

Question 2: What is the biggest mistake on taxes that you see energy companies making?

Andy: One of the most common mistakes I see is mis-identifying assets.  When oil and gas companies place assets in service, it is common to see a ledger thousands of lines long that make up those assets. Different assets have different depreciation methods.  It is easy to classify assets into the wrong category, and thereby use the wrong depreciation method, possibly missing out on deductions. To illustrate, intangible drilling costs (costs incurred to complete the drilling of an oil well, excluding the above the ground equipment) are fully deductible in the current year.  If those costs are labeled as equipment costs, they could be limited to being only 80% deductible. Worse still, they could be capitalized as part of the leasehold value for land development and not get depreciated at all. This can make a huge difference in tax deductions.

Question 3: What could every company in this industry change about their financial reporting to optimize their tax position?

Andy: I would say be meticulous about how you record your assets.  Specifically, track how long you’ve held them. If you do not have good records, upon sale, it is difficult to determine if the gains should be considered to be long term (which have favorable tax rates) or short term.

Question 4: What oil & gas tax deductions do many companies miss out on?

Andy: A great deduction is for depletion.  A depletion deduction can be taken against oil and gas income sort of as depreciation is taken on a tangible asset.  There are two methods to calculate it and professional tax advice on how to properly calculate and maximize it is necessary. However, unlike with tangible assets, depletion deductions can in certain cases be taken in excess of your basis and carried forward. This tax deduction is a great perk.

Another tax deduction that is very beneficial to oil and gas investments is the expensing of intangible drilling costs, or “IDCs”. For GAAP purposes IDCs are capitalized.  However, for tax purposes, IDCs are 100% deductible in the year of cash expenditure.  That’s why it is imperative to keep good records and properly classify assets. If you don’t identify your IDCs in the financials, you tax team won’t be able to make use of this great deduction for tax purposes.


Andy Hall’s Bio: Andy is a CPA and Tax Manager at Weaver specializing in the oil and gas industry. He has more than 12 years of experience in public accounting. Andy has extensive tax and consulting experience in mergers and acquisitions, business transactional services, multi-state income tax planning and compliance, and accounting for income taxes and uncertain tax positions. You can contact Andy via email at andy.hall@weaver.com.

About the Author: Olga Bashkatova is the founder of NextStage Advisory LLC, a firm that provides monthly bookkeeping services and CFO-level insights to growing businesses. Our mission is to give founders the confidence to use their financials as a tool. We believe in providing solutions, delivering on time, responding within 2 business days, and we guarantee more financial clarity in 90 days. This newsletter aspires to provide founders with the answers to pressing business problems that are just too tough to find on the world wide web.

Olga Bashkatova

Weaver is a national accounting and consulting firm with comprehensive capabilities to serve any client. But at our core, we are so much more. More ambitious. More willing to go above and beyond to do work we’re deeply proud of. More focused on building meaningful business relationships. More passionate about creating a culture that allows every team member to thrive — and every client to experience the Weaver difference.


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