We’ll Pay For It With Oil 2

Once again we’re after the Oil & Gas Companies.

Look, I’m not saying that I have any affinity for these top five gas companies that keep being targeted. Yes, my dad does own stock in Exxon, but that’s just because he worked there for a couple unenjoyable years. Really, these companies are just like any other publicly traded company trying to give a good return to their shareholders so your grandma can have a decent return on her 401(k).

Which is why I think it’s funny how strongly they are coming under attack.

The picture seemed appropriate

Yes, they do oil and gas, which may not be the best for the environment. And yes, occasionally they have oil spills which end up being catastrophes bigger than other companies could make if they tried.

So yeah. I don’t feel bad for them, I just think they are being overly targeted just because certain people don’t like their industry. But isn’t that like blaming the Mexican drug cartels for Americans’ addictions to illegal substances?

Okay, maybe that’s not the best comparison.

Anyway, I’ve heard one too many times over the last couple months we need to get rid of the “tax loopholes” for oil & gas, or we need to stop subsidies to these huge companies. Or that we shouldn’t be helping out big oil with their windfall profits.

Pop quiz: What “loopholes” or “subsidies” or “help” do we give big oil? It was amazingly difficult to find out what actually constituted this supposed special treatment. I finally was able to find an actual vote held a couple months ago to keep the oil fat cats at bay (it failed), and now I finally know what their sins really are (link to bill here, for those who love sources)

Warning: some accounting speak ahead.

Special Treatment #1: Section 263(c) Intangible Drilling Costs. This is one of those “Duh” special treatments. Oil & Gas companies have certain expenses while searching for new wells. Since no one else is drilling for wells, no one else will have it. Basically the “loophole” the oil companies are enjoying is being able to expense these costs when they occur instead of expensing them over the life of the well. It’s just a debate over a deduction now or a deduction sometime in the future. I’m sure the government does get marginal benefit from having large companies take fewer deductions now because of the time value of money thing, but really it’s more of an accounting trick that will make the government’s accounts look better now but look worse in the future. Of course, if you’re a politician, the short term is all you really care about.

Additionally, if you currently expense the the IDCs, you’ll probably end up with huge a huge AMT adjustment, as I painstakingly discovered this week (for those who don’t recall, AMT is the part of the tax code personally written by the Devil himself).

Special Treatment #2: Section 199 Domestic Production Activity Deduction (“DPAD”). This allows a special deduction for certain qualified work done in the United States. The idea is to give companies incentive for hiring in the US instead of abroad. All companies, not just Oil & Gas.

I can understand if you don’t like DPAD in general. It was implemented by Bush in 2004, and everything Bush did was evil. But if it’s so bad that Big Oil can’t have it, take it away from everyone (USA Today had a good editorial about this back in May. They were in favor of getting rid of the deduction in total). I really don’t understand why more people aren’t calling for DPAD’s total recall instead of just for O&G, but it’s a lot harder to take a deduction away from Mom & Pop than it is from the bad guy. Still, in the theoretical world of Government Accounting, repealing DPAD would bring in more tax revenue.

Special Treatment #3: Percentage Depletion. As an oil company uses up a well that they purchased, they get to deduct the well. Any company that uses up something in the ground get the same treatment, so, once again, not special. The bill doesn’t allow these big oil companies to use Percentage Depletion, but instead use Cost Depletion. I don’t recall, nor care to research, the difference, but I’m guessing Percentage Depletion allows more expense now and less later, and Cost Depletion is more flat. Once again, the O&G company gets to deduct the same amount, it just makes the government books appear bigger in the short term but worse in the long run.


Special Treatment #4: Tertiary Injectant. This is the process of injecting liquids or gasses to get more oil out of the well. The argument is whether the companies should get to deduct the expense currently or capitalize the amount and deduct over the life of the well. Once again, this is a deduction now vs. a deduction later type thing, so no real addition to government income in the long run.

Special Treatment #5: Outer Continental Shelf Deep Water and Deep Gas Royalty Relief. Something to do with helping oil companies with their leases in certain conditions. I really don’t feel like researching exactly what it is, so let’s just call it special treatment.

So there you go. Of the 5 theoretical “loopholes” or “Special Treatments” the big oil companies get, three are what we call in the tax world “timing differences” which will only help the government books look better in the short term and one is a deduction that all domestic companies receive. Only one looks even remotely like special treatment to me.

And none of them are “loopholes,” which is when a company or individual uses the tax code as it was not originally intended. This isn’t deducting your aircraft interest expense with the home mortgage interest deduction, or hiding your income with the Foreign Tax Credit. These were specifically written in the law as alternatives for how the Oil & Gas industry could treat items that only apply to them.

What’s actually happening here is that certain politicians want special unfavorable treatment for these five oil companies. If that’s what you want, fine, just don’t dress it up as something it’s not.

Next Up: I haven’t decided, but it’ll be about why some main stream Republican view of taxation is wrong, since this is obviously a Democrat favorite and I’m really trying to be unbiased here.

UPDATE: After I finished writing this article, Obama announced his American Jobs Act. It appears to include a repeal of the items listed above, as well as a few more. At first glance none of them, again, appear to be special treatment, but if anyone has done more research into this and knows, let me know in a comment below.

Disclaimer: I am a CPA in Colorado, but this is not tax advice. If you use a code section in here to find your actual research, let me know, it’ll make me feel good, just don’t use me as a source or rely on anything in here as a authority or source. And if you’re an accountant and considering for a moment using my ranting as a source, shame on you. You know better than that.

  • Guest

    For Special Treatment #4…why should oil companies get to deduct the cost of injecting liquid into the ground when they profit from it (by getting more oil than they otherwise would)? Seems like a business expense to me…

    • Anonymous

      As you mention, it’s a business expense, and the general rule is that business expenses are deductible, even if it makes your business more profitable (think upgrading your computer systems or paying for advertisements, both deductible business expeneses). The question for debate is whether they should get to deduct it in the year they pay for the treatment, or if the deduction should be taken over the life of the well.