Energy Sector Deductions and Compliance: Practical Steps for Mid-Size Oil & Gas Operators
Learn how mid-size oil & gas operators can cut taxes with IDCs, tangible cost planning, depletion, and expert energy-sector tax strategies for full compliance.
carlajansy
Operating in the oil and gas industry implies that one has to cope with complex financial issues on a day-to-day basis. When it comes to controlling the drilling activities, equipment expenditure, and the ability to remain compliant with the ever-varying government regulations, no one pays much attention to tax planning. However, here is the part where proper oilfield accounting and taxation can save your operation thousands or even millions of dollars per year.
Midsize operators have their own problems. This is too big to be managed by mere accounting, but sometimes too small to have a full-time tax department. And that is where intelligent planning and just the right support of the profession come in. Being prepared with your deductions, keeping your financial records in order, and collaborating with professionals in oil and gas tax services[1] can be the difference between being overwhelmed by your taxes and being able to handle them.
Which tax deductions are most popular among mid-size oil and gas operators?
The oil and gas middle players can enjoy a number of beneficial deductions that minimize tax payable considerably. Among the greatest deductions are intangible drilling costs (IDCs), which include spending on labor, chemicals, and drilling fluids that are not of any salvage value. Physical equipment expenses on pumps, tanks, and wellhead equipment may be depreciated over a number of years. Repairs, maintenance, and utility costs constitute a part of lease operating expenses and are eligible for full deductions in that year. Depletion allowances allow the operators to deduct some revenue to reflect on dwindling reserves. The services of professional oil and gas tax practitioners assist in the identification of all the possible deductions that can be obtained to reduce tax liability.
What is the difference in intangible drilling costs (IDCs) and tangible costs when it comes to taxation?
It is also important to realize that there is a distinction between IDCs and tangible costs to account for and tax the oilfield properly. These two types can be used in the following way:
-
Intangible Drilling Costs (IDCs) are costs that cannot be salvaged after drilling. These expenses include workforce, fuel, hauling, mud used in drilling, chemicals, and greases, among others, that are used in the drilling process.
-
The large tax benefit is that IDCs should be immediately deductible in the year in which they are earned, and they are subject to immediate tax relief.
-
Physical equipment and supplies that can be recovered after their installation comprise tangible drilling costs.
-
The cost of the IDCs is usually 60 to 80 percent of the total drilling expense associated with most wells.
-
The tangible costs are to be depreciated within a span of seven years through the use of the Modified Accelerated Cost Recovery System (MACRS).
-
The classification is critical for maximum tax benefits.
What is the use of having a tax advisor who has expertise in oil and gas accounting?
There is a big difference between working on dedicated oil and gas tax services and working as a general accountant. Here's a clear comparison:
|
Selecting a Specialized Advisor as a partner. |
Failing to invest with a Specialist Advisor. |
|
Experts guide the organization to start with a tax-efficient structure, select the best types of entity, partnership, and accounting techniques to minimize the long-term sustainable tax liability of energy operations.
Oilfield accountants and tax advisors are familiar with such industry-specific deductions as IDCs, depreciation allowances, and Section 179.
Energy-oriented tax services offer strategy planning associated with plans to drill, to ensure that the operator schedules their expenses to maximize deductions and effectively utilize cash flows during active market periods. |
General accountants also risk failure to receive deductions specific to the oil and gas industry since they lack a thorough understanding of the provisions of the tax code of oil and gas.
Without specialized guidance, operators may use suboptimal structures that increase tax burden unnecessarily.
General tax accountants usually offer only reactive tax preparation, excluding active planning, and they do not get the chance to plan deductions and deal with variable revenue streams typical in energy. |
Professionally, it is important to note that oilfield accounting and taxation are quite complex, and specialized knowledge is very useful. Reputed tax firms such as H&M Tax Group focus on the income tax filing[2], bookkeeping, and support with QuickBooks in the needs of the energy industry, helping the operators to maximize the deductions and still remain fully compliant.
Conclusion
Oil and gas taxes do not have to be manageable in a stressful manner. Using structured systems, knowledge of deductions they may claim and correct grouping of the drilling expenses, mid-size operators have an excellent opportunity to lower their tax bill considerably, without breaking it completely and remaining entirely within regulations.
It is worth thinking of collaborating with company specialists such as H&M Tax Group, who are aware of the peculiarities of accounting and taxation of oilfields. The cost of the professional advice is usually many times over in terms of detected savings and prevented compliance problems.
Sources:
[1] https://hmtaxgroup.com/practice-areas/oil-and-gas-tax-services
[2] https://hmtaxgroup.com/tax-services/individual-income-tax-consultant
