California to Repeal Key Tax Benefits for Oil Production
Budget legislation reflects governor’s priorities for repealing oil and gas tax benefits, as outlined in January budget proposal.
The California legislature passed budget legislation that repeals three key tax provisions that benefit oil and gas production. SB 167 repeals the state’s conformity to federal tax law on the immediate deduction for intangible drilling costs, the percentage depletion for fossil fuels, and the tax credit for enhanced oil recovery costs. Governor Gavin Newsom included these changes in his original January budget proposal. He must sign the bill into law by June 27.
Eliminate Immediate Deduction for Intangible Drilling Costs
The budget legislation eliminates the provision that conforms to Section 263(c) of the Internal Revenue Code to allow an immediate deduction for up to 70% of intangible drilling costs for oil and gas wells and geothermal wells (100% for independent oil producers). The repeal would apply to costs incurred on or after January 1, 2024. Intangible drilling costs include surveys, ground clearing, drainage, repairs, and other such work. Producers must amortize the remaining 30% of these costs over five years.
The immediate deduction is designed to encourage investment in oil production. The repeal of this tax benefit will likely further discourage investment from independent producers. California has conformed to federal tax law on this provision since 1987.
Percentage Depletion Rules for Fossil Fuels
The legislation also repeals the calculation of the deduction for depletion of natural resources as a percentage of gross income from the property (15% for independent producers). This applies to specified natural resources, including coal, oil, oil shale, and gas and apples to tax years beginning on or after January 1, 2024. California has conformed to federal law on this provision since 1993. The deduction of a fixed percentage of gross income is higher than the normal cost-depletion method.
The legislation also eliminates the statute that allows the state to not conform to federal law that prevents refiners with average daily refinery runs of more than 75,000 barrels for a tax year from calculating a depletion deduction as a percentage of gross income.
Enhanced Oil Recovery Costs Credit
Lastly, the budget legislation eliminates the 5% tax credit for qualified enhanced oil recovery (EOR) costs that applies to small, independent oil producers. This benefit applies only when oil prices are low. This repeal is effective December 1, 2024.