Editor & Publisher, Marcellus Drilling News (MDN)
[Editor’s Note: The Clean Energy for America Act now being being advanced by Democrats is another scam flowing from the global warming con game.]
The Democrats in Congress are making another run at punishing (eliminating) the use of fossil fuels. About a month ago Senate Finance Committee Chairman Ron Wyden (wacko from Oregon) and 24 fellow Senate Democrats introduced a bill called “The Clean Energy for America Act”–an overhaul of the federal energy tax code, aimed at combating nonexistent human-caused climate change.
This time around the Dems are targeting (among other things) repeal of the percentage depletion allowance that landowners and investors use in offsetting royalty payments for tax purposes. In other words, mom and pop landowners that receive royalties will see their federal income tax bills go up. Unless you stop this disgusting bill now, before it becomes law.
The so-called Clean Energy for America Act is a horrible bill from beginning to end, but in this post, we will concern ourselves with only the percentage depletion allowance.
Let’s begin with what percentage depletion is. While the following definition from Investopedia doesn’t mention landowners specifically, all of the below applies to landowners as well as drillers and investors:
What Is Percentage Depletion?
Percentage depletion is a tax deduction for depreciation allowable for businesses involved in extracting fossil fuels, minerals, and other nonrenewable resources from the earth.
- The depletion allowance has made oil and gas at the wellhead one of the most tax-advantaged investments available.
- The deduction is intended to incentivize domestic energy production.
- The depreciation rates allowable vary for different resources.
Percentage depletion assigns a set percentage of depletion to the gross income derived from extracting these nonrenewable resources. The deduction is intended as an incentive for drillers and investors to develop domestic mineral and energy production.
How Percentage Depletion Works
The rules of oil and gas accounting require that the costs incurred to find, develop, and obtain minerals and oil- and gas-producing properties must be capitalized.
Percentage depletion allows for an income tax deduction for these capitalized costs, reflecting the declining production of reserves over time. The percentage depletion is a measure of the amount of depletion associated with the extraction of nonrenewable resources. It is an allowance that independent producers and royalty owners can apply to the taxable gross income of a productive well’s property.
The Benefit to Investors
Oil and gas investments at the wellhead have become one of the most tax-advantaged investments available in the U.S. today due to the depletion allowance. Approximately 15% of gross income from oil and gas is tax-free for small investors and independent oil and gas producers.
There is no dollar limit to the total amount of depletion that can be deducted from income from qualified nonrenewable resources. However, percentage depletion can only be taken from a property that has net income (or profits).
If a property recognizes a net loss for any given tax year, percentage depletion cannot be deducted.
Percentage depletion is limited to 50% of net income, less exploration costs.
The allowable statutory percentage depletion deduction is the lesser of net income or 15% of gross income. If net income is less than 15% of gross income, the deduction is limited to 100% of net income.
Depreciation Rates Vary
Percentage depletion is a capital cost recovery method that is allowed for nearly all natural resources except timber.
The IRS sets different depletion rates for different resources. Some of the rates are as follows:
- Oil and gas, 15% percent
- Sand, gravel, and crushed stone, 5%
- Borax, granite, limestone, marble, mollusk shells, potash, slate, soapstone and carbon dioxide produced from a well, 14%
- Sulfur and uranium, 23%
- Gold, silver, copper, iron ore, and certain oil shale from U.S. deposits, 15%
The percentage depletion formula requires that gross income be multiplied by the appropriate percentage.
The following is a small excerpt of an analysis of the Clean Energy for America Act by attorneys at energy law firm Mayer Brown. This is how the bill, if it becomes law, will impact the fossil fuel industry:
Repeal tax incentives related to fossil fuels – The proposal would repeal a number of provisions related to the fossil fuel industry. Specifically, Wyden’s bill would (a) terminate Section 167(h) related to geological and geophysical expenses; (b) repeal the Section 193 deduction for tertiary injectants; (c) eliminate the ability for certain taxpayers to immediately deduct intangible drilling and development costs under Section 263(c) for certain oil and gas wells; (d) eliminate percentage depletion (under both Section 613 and Section 613A) for oil and gas wells, coal, lignite and oil shale; (e) eliminate capital gains treatment for royalties from coal under Section 631(c); (f) eliminate the Section 43 enhanced oil recovery credit; (g) eliminate the Section 45I credit for producing oil and gas from marginal wells; (h) eliminate the Section 48A qualifying advanced coal project credit; (i) eliminate the Section 48B qualifying gasification project credit; (j) reinstate the treatment of foreign base company oil related income as foreign base company income under Section 954; (k) include foreign oil and gas extraction income in tested income for purposes of determining global intangible low-taxed income under Section 951A; (l) modify Section 7704(d)(1) to eliminate the ability for certain oil, gas or coal activities to fall within the publicly traded partnership rules; and (m) make certain other conforming changes.
We received an email from NARO, the National Association of Royalty Owners, about the bill, with an urgent call to action. This week the Senate Finance Committee will work on the bill. NARO urges landowners/royalty owners to contact the list of Senators below who belong to the Finance Committee to ask them to remove the provision from the bill concerning the percentage depletion allowance. We’d ask them to ax the bill completely, but perhaps that’s too much to hope for?
Percentage Depletion Allowance is Earmarked to be Removed as a tax allowance for Royalty Owners.
Your Action on this email is Critical to educating our Senators of the importance of Percentage Depletion Allowance.
Wednesday, the US Senate Finance Committee will take up the Clean Energy For America bill, sponsored by Chairman Ron Wyden (D-OR), which would among other things, eliminate percentage depletion.
To read more about this bill, click this link: https://www.finance.senate.gov/chairmans-news/-wyden-colleagues-introduce-legislation-to-overhaul-energy-tax-code-create-jobs-combat-climate-crisis
Use the list below to Call or Email the Senator(s) on the Finance Committee and let them know that percentage depletion is important to you. You can also use this link to see reach out to the committee Senators:
If you wish to email or post comments on a Senator’s webpage, click on the Senator’s name below.
NARO highly recommends you add a personal introduction and why removing the elimination of percentage depletion from the Energy Tax Bill is personally important to you, with the Action Points below.
Here are the Call To Action Points of discussion:
- As a royalty owner that benefits directly from percentage depletion, I urge you to contact Chairman Wyden and ask him to remove this harmful provision from the bill.
- This is the only tax allowance small royalty owners receive on their depleting natural resource.
- Removing this allowance will increase my Federal taxes.
- “Big Oil” companies will not be impacted by eliminating percentage depletion.
- It mainly benefits landowners in real areas and micro small businesses – less than 15 employees.
- Many of us are also retirees who rely on royalty payments as part of income needed to live.
- With COVID still impacting the economy, It would be especially cruel for Congress to harm those of us trying to regain our footing financially.
- The money the government would gain from doing away with this provision would be a “drop in the bucket” compared to the $4 trillion deficit we have today but the economic harm in the form of a tax increase and monies lost by people like me would real and immediate.
Editor’s Note: This is yet another nefarious attempt by the green eggs scammers from the hedge fund community and other special interests to hit oil and gas where it hurts by undermining support in rural America so they have less competition and greater ability to wrangle ratepayer and taxpayer subsidies out of government.
Global warming, euphemistically labeled climate change so as avoid the uncomfortable fact that the models don’t work, not to mention being able to label all bad weather as the result, has become the du jour formula for getting rich quick. This Clean Energy for America bill is about eliminating competition from oil and gas with a side benefit of sticking it to rural Americans who don’t easily fall for the global warming scam.
This con game continues because too many people who know better, including members of the industry, go along to get along. They try to appease the global warming cult in hopes it will eventually go away but it won’t because that’s where the money is today — on the con.
This post appeared first on Natural Gas Now.