Obama proposes removal of tax breaks from oil companies in the US

[Darwin333]

nearly all the expenses for a well are in getting it drilled and producing. so it probably makes sense to expense that immediately. even the small guys bear that same curve.

I used to be a roughneck and trip derricks so other than the survey and test wells, yes the vast majority of the expense is drilling the well. Producing is even minimal compared to the cost of actually drilling and casing the well.

I guess my question is more of a tax one, if I purchase a truck for my company today and pay cash the majority of my costs are today. From what I understand of tax law, I get to depreciate that vehicle over 5 years and with the current (perhaps expired?) advanced depreciation I get to take half of the value in the first year.

Is this basically the same thing except they don't have to wait 5 years to get the entire value of the well? If so it would seem like this is more of a capital issue for the oil companies rather than an actual revenue issue for the gov. The companies still pay the same amount of taxes over the long run they just get the entire deduction in one year instead of spread out over a few years.

Fern? Someone who knows tax law help me out here please.

 

[Icepick]

So, has Fox News spun this as a massive tax increase yet? Threatening thousands of jobs?

Give them time.

 

[EagleKeeper]

I used to be a roughneck and trip derricks so other than the survey and test wells, yes the vast majority of the expense is drilling the well. Producing is even minimal compared to the cost of actually drilling and casing the well.

I guess my question is more of a tax one, if I purchase a truck for my company today and pay cash the majority of my costs are today. From what I understand of tax law, I get to depreciate that vehicle over 5 years and with the current (perhaps expired?) advanced depreciation I get to take half of the value in the first year.

Is this basically the same thing except they don't have to wait 5 years to get the entire value of the well? If so it would seem like this is more of a capital issue for the oil companies rather than an actual revenue issue for the gov. The companies still pay the same amount of taxes over the long run they just get the entire deduction in one year instead of spread out over a few years.

Fern? Someone who knows tax law help me out here please.

You correctly understand.

As example
Rather than dribble out the depreciation over 5 years (20% year); the Government now says (60%) the first year and (10% for next 4 years).

Over 5 years, the government still is allowing the total amount, but the company gets more of it up front to recoup and reinvest into the business.

If the company sinks 2 wells in one year, the government is allowing the to recoup the depreciation costs enough to sink a third well the next year with no additional capital. Otherwise they would have to wait (via accounting) 4 more years to afford to sink that third well.

 

[Darwin333]

You correctly understand.

As example
Rather than dribble out the depreciation over 5 years (20% year); the Government now says (60%) the first year and (10% for next 4 years).

Over 5 years, the government still is allowing the total amount, but the company gets more of it up front to recoup and reinvest into the business.

If the company sinks 2 wells in one year, the government is allowing the to recoup the depreciation costs enough to sink a third well the next year with no additional capital. Otherwise they would have to wait (via accounting) 4 more years to afford to sink that third well.

So that specific "subsidy" isn't really a subsidy at all, the .gov still gets the same amount of money just on a different timeline. The oil companies pay the same amount of taxes (over the long run) but have more capital in the short term to invest in further drilling/exploring.

 

[EagleKeeper]

^^ Correct

Just like your Federal tax refund.

Have an extra $20 each paycheck now or get $1000 from Uncle at end of year.

Same amount of money; just depends on who holds onto it when

 

[Ausm]

Here is a good video on Tax breaks for Big Oil.

http://www.americanprogress.org/issues/2011/05/ate_hanlon.html

 

[Fern]

You describe the process as being like a writeoff from income, when according to the article it's more like a tax credit, taken directly from the amount due to the govt. $100 of income means, let's say, $35 in taxes, which turns into $20 after the depletion allowance...

Do other extractive industries like mining & timber get the same depletion allowance?

The article is wrong. As are many regarding tax, which is why I thought to write a better explanation.

Depletion is not a credit. It's an expense.

Yes, mining is allowed either percentage or cost depletion similarly to oil & gas.

Timber is not eligible for percentage depletion. I would suspect because it is above ground in plain sight and therefore far easier to come up with an accurate estimate of the amount of material.

Here's the IRS pub on depletion for anyone interested:

http://www.irs.gov/publications/p535/ch09.html#en_US_2011_publink1000209033

Fern

 

[Fern]

-snip-
I guess my question is more of a tax one, if I purchase a truck for my company today and pay cash the majority of my costs are today. From what I understand of tax law, I get to depreciate that vehicle over 5 years and with the current (perhaps expired?) advanced depreciation I get to take half of the value in the first year.

Actually, you also have a law available to you to expense the entire amount of the truck in the 1st year. It's section 179, an election you make on your tax return.

Is this basically the same thing except they don't have to wait 5 years to get the entire value of the well? If so it would seem like this is more of a capital issue for the oil companies rather than an actual revenue issue for the gov. The companies still pay the same amount of taxes over the long run they just get the entire deduction in one year instead of spread out over a few years.

Fern? Someone who knows tax law help me out here please.

Yes. So, at most it's a 'time value of money' thing. (I.e., a dollar received today is worth more than one next year.)

Fern