Federal Tax Incentives:

Marginal Oil & Gas Well Production Credit

Summary 

 

In 2004, Congress enacted the Federal Marginal Oil & Gas Well Production Credit amendment to the Internal Revenue Code that established a tax credit for existing marginal wells. The intent behind the tax credit was to serve as a safety net for marginal wells during periods of low pricing. The tax credit is particularly beneficial to small well producers, who typically produce limited barrels a day.

However, similar to the Federal Enhanced Oil Recovery Credit (under IRC § 43), the Federal Marginal Oil & Gas Well Production Credit is dependent upon commodity pricing, subject to applicable thresholds pursuant to IRC § 45I. The marginal well tax credit has not been available generally during most prior year tax years, as prices have remained above the commodity threshold. 

In general, the marginal well tax credit provides a $3-per-barrel credit for the production of crude oil and $0.50-per-1,000-cubic-feet (Mcf) credit for the production of qualified natural gas. IRC § 45I(b)(1) [credit amounts are then adjusted for inflation as specified by statutory language]. The credit is available for domestic production from a "qualified marginal well." See IRC § 45I(b)(1).

Per IRC § 45I(c)(3)(A), a qualified marginal well generally refers to a domestic oil well that produces

  • not more than 15 barrel of oil equivalents per day,

  • wells that produce heavy oil, or

  • wells with average production of not more than 25 barrel of oil equivalents a day of oil and produces not less than 95% water. 

Thus, qualified marginal gas wells generally include those producing not more than 90 Mcf a day (one barrel of oil is equivalent to 6 Mcf). IRC § 613A(c)(6)(E). The maximum amount of production on which a credit may be claimed is 1,095 barrels or barrel-of-oil equivalent per year, per well. IRC § 45I(c)(2)(A). There is also a limitation for wells not capable of production during each day of a taxable year. IRC § 45I(c)(2)(B). 

To claim a marginal well credit, a taxpayer must own an operating interest in the well. IRC § 45I(d)(2). To the extent the well has more than one owner, the credit amount is allocated in proportion to the owner's revenue interests in comparison to the interests of all the operating interest owners. IRC § 45I(d)(1).

Carryback and Carryforward of Unused Credit

A key component of the marginal well credit is that it has a special carryback provsion where unused credits may be carred back for 5 years. See IRC § 39(a)(3). The credit also may be carried forward for 20 years. See IRC § 39(a)(3).

 

If you have an unused credit after carrying it back to each of the preceding 5 tax years (not just 1), then carry it forward to each of the 20 tax years after the year of the credit. In general, an owner of a marginal well may claim the credit any time within 3 years from the due date (excluding extensions) of its return on either its original or an amended return.

 

IRS Links, Notices, & Filing Requirements
  • Use Form 8830 to claim the enhanced oil recovery credit. This credit is part of the general business credit.

    • An owner of an operating mineral interest may claim or elect not to claim this credit any time within 3 years from

  • Notice 2019-37 provides the applicable reference price for qualified natural gas production from qualified marginal wells during tax years beginning in 2018. The notice reflects an estimate of the annual aver­age wellhead price per 1000 cubic feet for all domestic nat­ural gas for purposes of the credit in section 45I for calendar year 2018, is $2.68 per 1000 cubic feet (meaning the section 45I credit is $0.00 per 1,000 cubic feet of qualified natural gas produced from marginal wells).​

  • Notice 2019-38 provides that the applicable percentage for purposes of determining the percentage depletion on marginal properties for 2019 is 15%. Read the IRS notices in IRB 2019-23

  • See IRS Priority Guidance Plan​ (10/8/2019).

    • "Notice regarding marginal well production credit under IRC § 45I for natural gas produced in 2019" projected to by provided by the IRS May 2020.

    • "Notice regarding Marginal Production rates under IRC § 613A for oil and gas well depletion" to be provided by the IRS May 2020.

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