AndreTaxCo, PLLC

Background – IRC §43 Enhanced Oil Recovery Credit

​

The Federal Enhanced Oil Recovery Credit under IRC §43 is commodity price-sensitive and applies only when the reference price of domestic crude oil does not exceed $28, adjusted for inflation (IRC §43(b)(1)). Qualified projects must use a certified tertiary recovery method (Treas. Reg. §1.43-2(e)(2)) and result in more than an insignificant increase in crude oil recovered (Treas. Reg. §1.43-2(b)). These qualified tertiary methods include recovery methods by stem, gas, flood, chemical flood, and mobility control (Treas. Reg. §1.43-2(e)(2)). However, utilization of one of these methods alone does not qualify a project for the credit. The credit requires more than an insignificant increase in the amount of crude oil that is ultimately recovered (Treas. Reg. §1.43-2(b)).

​​

Additional requirements of qualified enhanced oil recovery project include that the project must be domestically located, the initial implementation must have commenced after December 31, 1990, and the project must be certified pursuant to Treas. Reg. §§1.43-3 (see also Treas. Reg. §1.43-2(a)(4)).

​​

Taxpayers who meet these requirements are entitled to a credit equal to 15% of the qualified enhanced oil recovery costs incurred in a tax year.

​

Current Status (As of 2024) -- Phased Out

The credit remains fully phased out for calendar tax year 2024 due to high crude oil prices exceeding the inflation-adjusted threshold (see Notice 2024-61; 2024-34 IRB 520). Because the reference price for the 2023 calendar year ($76.10) exceeds $28 multiplied by the inflation adjustment factor for the 2024 calendar year ($28 multiplied by 2.0615 = $57.72) by $18.38, the enhanced oil recovery credit for qualified costs paid or incurred in 2024 is phased-out completely.

​

Qualified Costs

Qualified costs pursuant to IRC §43(c)(1) may include the following designated expenses:

• amounts paid for depreciable tangible property,

• intangible drilling and development expenses,

• tertiary injectant expenses, and

• construction costs for certain Alaskan natural gas treatment facilities.  

 

​Basis & Deduction Adjustments

Taxpayers must reduce deductions and property basis by the credit amount (IRC §43(d)(1)-(2)).

​

Carryback/Carryforward

Credit follows IRC §39 rules (1-year carryback, 20-year carryforward). Unused credits after carryforward period may be deductible under IRC §196.

​

Amount of Credit
IRC §43(a) provides that for purposes of IRC §38, the enhanced oil recovery credit for any taxable year is an amount equal to the following: 

• 15% of the taxpayer’s qualified enhanced oil recovery costs for such taxable year.

• However, it is reduced when the reference price per barrel of crude oil is more than the base value of $28 (as adjusted by inflation).

  • IRC §43(b)(1) provides that the amount of the credit determined under subsection (a) for any taxable year shall be reduced by an amount which bears the same ratio to the amount of such credit (determined without regard to this paragraph) as – (A) the amount by which the reference price for the calendar year preceding the calendar year in which the taxable years begins exceeds $28, bears to (B) $6.

  • IRC §43(b)(3)(B) of the Internal Revenue Code requires the Secretary to publish an inflation adjustment factor. The enhanced oil recovery credit under § 43 for any taxable year is reduced if the “reference price,” determined under § 45K(d)(2)(C), for the calendar year preceding the calendar year in which the taxable year begins is greater than $28 multiplied by the inflation adjustment factor for that year.

  • The term “inflation adjustment factor” means, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990.​

​​​

IRS Links & Filing Requirements

• Form 8830 required for partnerships and S corporations when credit applies; report on Form 3800 for other taxpayers.

• Petroleum engineer certification required under Treas. Reg. §1.43-3.