AndreTaxCo, PLLC

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). The credit begins to phase out when the reference price of crude oil exceeds $15 per barrel and $1.67 per metric cubic foot (mcf) of gas production, and is completely phased out if the reference price exceeds $18 per barrel or $2.00 per mcf, respectively (all as adjusted for inflation). 

​

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

• the production from which during the taxable year is treated as marginal production under IRC § 613A(c)(6) [means domestic crude oil or domestic natural gas which is produced during any taxable year from a property which is (1) a stripper well property for the calendar year in which the taxable year begins, or (2) is a property substantially all of the production of which during such calendar year is heavy oil], or;

  • IRC § 613A(c)(6)(E) states the term “stripper well property” means, with respect to any calendar year, any property with respect to which the amount determined by dividing— the average daily production of domestic crude oil and domestic natural gas from producing wells on such property for such calendar year, by the number of such wells, is 15 barrel equivalents or less.

  • ​IRC § 613A(c)(6)(F) states the term “heavy oil” means domestic crude oil produced from any property if such crude oil had a weighted average gravity of 20 degrees API or less (corrected to 60 degrees Fahrenheit).

• which, during the taxable year

  • has average daily production of not more than 25 barrel-of-oil equivalents (as so defined), and produces water at a rate not less than 95 percent of total well effluent.

​

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

• The credit amount for producing natural gas for tax years beginning in calendar year 2021 is $.067 per mcf and for tax years beginning in calendar year 2020 is $0.66 per mcf (See Notice 2022-18; Notice 2021-34)

• The credit is claimed on Form 8904 and is part of the general business credit, subject to its tax liability limitation and carryover rules

• Updates for Form 8904 (Rev. December 2018) per Notice 2022-18 -- 11-MAY-2022

• Updates for Form 8904 (Rev. December 2018) per Notice 2021-34 -- 10-JUN-2021

• Updates for Form 8904 (Rev. December 2018) per Notice 2019-37 and Notice 2020-34 --22-MAY-2020

• Notice 2020-34, Reference Price for Section 45I Credit for Production of Natural Gas from Marginal Wells During Taxable Years Beginning in Calendar Year 2019

• Notice 2017-51, Reference Price for Section 45I Credit for Production of Natural Gas from Marginal Wells