AndreTaxCo, PLLC

Summary Background

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The Federal Enhanced Oil Recovery Credit is dependent upon commodity pricing. A taxpayer is eligible for the Federal Enhanced Oil Recovery Credit if the reference price of domestic crude oil does not exceed $28.00, adjusted for inflation. See IRC Sec. 43(b)(1). The enhanced oil recovery credit is available for qualified enhanced oil recovery projects. These projects are identified by the utilization of a tertiary recovery technique which increases the amount of crude oil extracted from an oil field. See IRC 43(c)(2)(A)(i). These qualified tertiary methods include recovery methods by stem, gas, flood, chemical flood, and mobility control. See Treas. Reg. 1.43-2(e)(2). However, utilization of one of these methods alone does not qualify a project for the credit. The credit requires more than an insignificant increase in the amount of crude oil that is ultimately recovered. See Treas. Reg. 1.43-2(b)

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Additional requirements of qualified enhanced oil recovery project include that the project must be domestically located, the initial implementation must have commenced after December 31, 1990, and the project must be certified pursuant to Regulation Sec. 1.43-3. See Treas. Reg. 1.43-2(a)

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Taxpayers who meet these requirements are entitled to a credit equal to 15% of the qualified enhanced oil recovery costs incurred in a tax year. Qualified costs pursuant to IRC 43(c)(1) may include the following designated expenses:

• amounts paid for depreciable tangible property,

• intangible drilling and development expenses,

• tertiary injectant expenses, and

• construction costs for certain Alaskan natural gas treatment facilities.  

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To the extent a credit is allowed for qualified enhanced oil recovery costs, taxpayers must reduce otherwise allowable deductions that are associated with these costs. IRC 43(d)(1). Additionally, taxpayers must reduce the basis of property by the amount of the credit where the basis would otherwise be increased by the qualified enhanced oil recovery costs. IRC 43(d)(2). The credit may be carried back or forward under IRC 39 business credit carryover rules (e.g. carried back one year, carried forward 20 years). See Treas. Reg. 1.43-1(a)(1). And in the event the carryforward period has expired, any unused credit may be fully deductible. See IRC 196.

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Amount of Credit
Section 43(a) provides that for purposes of section 38, the enhanced oil recovery credit for any taxable year is an amount equal to the following: 

• 15% of the taxpayer’s qualified enhanced oil recovery costs for such taxable year.

• However, it is reduced when the reference price per barrel of crude oil is more than the base value of $28 (as adjusted by inflation).

  • ​Section 43(b)(1) provides that the amount of the credit determined under subsection (a) for any taxable year shall be reduced by an amount which bears the same ratio to the amount of such credit (determined without regard to this paragraph) as – (A) the amount by which the reference price for the calendar year preceding the calendar year in which the taxable years begins exceeds $28, bears to (B) $6.

  • Section 43(b)(3)(B) of the Internal Revenue Code requires the Secretary to publish an inflation adjustment factor (see IRS Notice 2019-36). The enhanced oil recovery credit under § 43 for any taxable year is reduced if the “reference price,” determined under § 45K(d)(2)(C), for the calendar year preceding the calendar year in which the taxable year begins is greater than $28 multiplied by the inflation adjustment factor for that year.

  • The term “inflation adjustment factor” means, with respect to any calendar year, a fraction the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990.

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Because the reference price for the 2018 calendar year ($61.41) exceeds $28 multiplied by the inflation adjustment factor for the 2018 calendar year ($28 multiplied by 1.7334 = $48.5352) by $12.88, the enhanced oil recovery credit for qualified costs paid or incurred in 2019 is phased out completely. Applying the section 43(b)(1) reduction ratio determines the phased out portion to be 100% for 2019. See IRS Notice 2019-36.

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(IR-2020-108): The U.S. Treasury & IRS recently issued proposed regulations to clarify prior 2018 legislation

The proposed regs provide guidance regarding two new credits for carbon oxide captured using equipment originally placed in service on or after 2/9/2018, allowing up to:

• $50 per metric ton of qualified carbon oxide for permanent sequestration, and

• up to $35 for Enhanced Oil Recovery purposes.

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Neither of these new credits is subject to a limitation on the number of metric tons of qualified carbon oxide captured. The new law also expanded carbon capture to include “qualified carbon oxide,” a broader term than “qualified carbon dioxide.” Prior to the change in law, carbon capture was limited to a total of 75,000,000 metric tons of qualified carbon oxide.

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Additionally, the proposed regulations address prior taxpayer questions, including: (1) procedures to determine adequate security measures for geological storage of qualified carbon oxide, (2) exceptions to the general rule for determining who the credit is attributable to, (3) procedures for a taxpayer to elect to allow third-party taxpayers to claim the credit, (4) standards for measuring qualified carbon oxide utilization & rules for recapture.

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IRS Links & Filing Requirements

• *Update on Filing Form 8830 per Notice 2022-19 for tax years beginning in 2022

  • ​For tax years beginning in 2022, the enhanced oil recovery credit is completely phased out. See Notice 2022-19.

• *Update on Filing Form 8830 per Notice 2021-47 for tax years beginning in 2021

  • For tax years beginning in 2021, the enhanced oil recovery credit is available at the full 15% credit rate.​

  • To claim the credit for tax years beginning in 2021 only, partnerships and S corporations must file Form 8830. We plan to release a new revision of Form 8830 in March for use with 2021 tax year returns. Until then, filers may use the 2018 Form 8830 by crossing out the year 2018 at the top of the form and writing-in the year 2021, then using 15% as the credit rate on line 2. All other taxpayers aren't required to complete or file Form 8830 if their only source of the credit is from a partnership or S corporation. Instead, they can report the credit directly on Form 3800, General Business Credit, Part III, line 1t.​

  • The credit is completely phased out for tax years beginning in 2019 and 2020. See Notice 2021-47 for full guidance.

• IR-2020-108, May 28, 2020

  • ​On March 9, 2020, the Treasury Department and the IRS published Revenue Procedure 2020-12,
    2020-11 I.R.B. 511, and Notice 2020-12, 2020-11 I.R.B. 495.

  • Revenue Procedure 2020-12 provides a safe harbor under which the IRS will treat partnerships as properly allocating the section 45Q credit in accordance with section 704(b).

  • Notice 2020-12 provides guidance on the determination of when construction has begun on a qualified facility or on carbon capture equipment that may be eligible for the section 45Q credit.

  • As requested by commenters, the safe harbor in Revenue Procedure 2020-12 and the rules in Notice 2020-12 are similar to those provided in prior guidance

• Certification from a Petroleum Engineer (see Form 8830, General Instructions)

  • Additionally, the operator or designated owner must file a certification from a petroleum engineer, who is registered or certified by a state, that the project meets the above requirements. The operator or designated owner also must file a certification each subsequent year indicating that the project continues to be implemented substantially in accordance with the petroleum engineer’s certification.

  • If the application of a tertiary recovery method is terminated, the operator or designated owner must file a notice of project termination for the tax year when the project terminates. 

  • See Regulations section 1.43-3 for the information required in the notice and certifications.