State of the oil and gas industry

With the passing of the Inflation Reduction Act (IRA), oil and gas entities gained access to nearly $500 billion in new federal funding and tax credits. The IRA created game-changing opportunities through energy incentives and tax credits for oil and gas entities to build infrastructure that existed for clean energy generation and production.

In the year since the IRA was signed into law, there have been significant updates in guidance and regulations. Watch this webinar to learn about the latest updates and the steps oil and gas companies can take to maximize the potential value of eligible IRA tax credits.

• Briefly review the Inflation Reduction Act
• Discuss relevant updates and guidance related to domestic content, energy communities, transferability and prevailing wage and apprenticeship
• Share real-world learnings from oil and gas clients
• Recommend next steps for oil and gas companies

Transferability

The Section 48C and 45X tax credits have been in force for almost 15 years but the IRA supercharged those incentives by broadening the types of entities that are eligible for these tax credits. It also introduced new features to those incentives, particularly what's called transferability. The IRA opened up the opportunity for a taxpayer to transfer a tax credit to someone who can better utilize it. This is an important feature particularly for oil and gas because taxable income in the upstream sector can vary broadly and, in some cases, you have longstanding write-offs for taxable income. Both tax credits offer substantial advantages for oil and gas companies, supporting their transition to cleaner energy and contributing to economic growth.

Energy community bonus

Congress and policymakers recognize that a transition toward cleaner energy sources broadly benefits air quality but disproportionately hurts communities where oil, gas and coal fuels are historically produced. The IRA seeks to boost clean energy investment into fossil energy communities and includes a special 10% tax credit bonus for these regions.

Three ways a location may qualify as being within an energy community:

• Brownfield category- A brownfield site, which is a site that contains or potentially contains a qualifying hazardous substance, pollutant, or contaminant that could impact development
• Statistical area category (fossil fuel region)- Statistical areas with significant fossil fuel employment or significant fossil fuel tax revenue, combined with higher-than-average unemployment rates in the previous year
• Coal closure category- A site located in a census tract where a coal mine has closed after 1999 or where a coal-fired generating unit was closed after 2009, as well as any directly adjacent census tracts

A location must meet at least one of these criteria to be considered an energy community and eligible for the energy community bonus credit. Check out our energy community mapping tool to see if you would benefit from this tax credit or contact us to get started today.

Prevailing wage & apprenticeship

The prevailing wage and apprenticeship credit is the largest available bonus for the IRA tax credits and drives a lot of value for maximizing the potential tax credit incentives available. It’s a five times multiplier of the base credit and to satisfy prevailing wage requirements you must maintain and preserve sufficient records along the way.

For example, to implement a solar installation to drive electric generation in an oilfield, it’s imperative to make sure the contractors and subcontractors you would employ to design, build and operate the facility understand the prevailing wage requirements they need to comply with. Vendors and subcontractors are often required to provide bi-weekly or monthly certified payroll reports.

Baker Tilly has begun to develop a compliance service that is meant to be a dashboard tracking tool for capital projects looking to make sure they comply with the prevailing wage and apprenticeship requirements.

*Note: Prevailing wage requirements do not apply for projects less than one megawatt in size nor for those that began construction before Jan. 29, 2023.

Domestic content

To claim a domestic content bonus credit amount, a taxpayer must satisfy the domestic content requirement for each applicable project and submit timely certifications to the IRS.

This credit may be applicable in the oil and gas industry if there are in-field generation assets that companies want to put in place to lower their electric costs in an oilfield or if they're looking at other equipment like combined heat and power. When you're doing your procurement for your clean energy infrastructure project, this is meant to promote American manufacturing but also recognizes that some equipment in the energy industry is largely currently manufactured abroad.

When oil and gas firms have unpaid amounts associated with suspended or unknown owners, it creates unclaimed property. These funds must be reported to various states after specific periods have elapsed. To avoid penalties, it’s essential to remain in compliance with state unclaimed property laws.

Unclaimed property compliance varies among states, and determining which state law applies depends on the last known address of the owner.

The focus of an examination can also vary depending on the sector within the oil and gas industry. Below are examples of unclaimed property challenges for upstream, midstream and downstream companies:

• Upstream: The primary focus is on mineral interest proceeds, joint-interest-billing accounts, revenue suspense balances and land checks.
• Midstream: The primary focus is on payments owed like uncashed checks, trade receivable balances, etc.
• Downstream: The primary focus is on unredeemed gifts or fuel cards.

Why it matters:

• Most Fortune 100 companies have undergone or are undergoing an unclaimed property (UP) audit(s), and now mid-sized and smaller companies are being targeted
• Properly handling unclaimed property challenges is essential to mitigate financial risk during audits
• Financial auditors are beginning to closely review/monitor a company’s potential unclaimed property exposure, which can materially impact a corporation’s financial statements
• Litigation and legislation impacting unclaimed property have significantly increased

Acquired suspense, like during mergers, acquisitions and divestitures can lead to unclaimed property liability. Oil and gas companies need to address unclaimed property to maintain compliance, avoid penalties and manage financial risks.

Below are the top five questions clients have about unclaimed property:

1. My CFO received an invitation from Delaware, what should I do?
   First, do not ignore and make note of the response deadline. Second, we recommend assessing your company’s familiarity with unclaimed property and the internal bandwidth to perform an assessment of your company’s potential unclaimed property exposure. If your company is unsure of either, we recommend your company consider bringing on outside help with either an accounting firm and/or a law firm.
2. My company has been reporting, but I am not sure if everything was included. What should we consider doing?
   It might be helpful for your company to qualitatively evaluate your company’s internal business processes to ensure all potential processes or functional areas are being considered in your company’s reporting process. If you find that a particular process is not being included (e.g., gift cards, trade A/R, etc.), we recommend identifying the total population of potential unclaimed property and then remediating/reviewing the population of transactions thoroughly. Following the required outreach effort, your company should then consider how best to report the property (report with a cover letter explaining the circumstance versus a voluntary disclosure agreement).
   For the processes or functional areas included in your company’s reporting process, we recommend your company select a population of transactions excluded from the reporting process (e.g., checks voided more than 90 days, credits reversed from a customer’s account, etc.) and ask the functional teams to provide the available supporting documentation to substantiate the reason for it being excluded from reporting. This will assess both your company’s business processes and document or record retention policies. If everything checks out, you should be set.
3. Is there a place where I can find information about the reporting requirements of each state?
   Our team maintains a state by state guide to unclaimed property reporting, which can be found on our website here: Unclaimed property: state-by-state guide - Baker Tilly. The guide does not include some of the oil and gas specific concepts mentioned during the presentation; however, please feel free to contact us directly and we can share other resources.
4. My company currently reports unclaimed property internally and is now looking to outsource the reporting process. Is this a service Baker Tilly provides?
   Yes, this is a service Baker Tilly provides to several companies across virtually all industries. Our team can provide a comprehensive outsourced solution, or customizable solution that is tailored to your company’s specific needs/wants. Please get in touch with us directly for further information.
5. We do our own unclaimed property reporting, but we aren't sure if we're staying up to date with all the law changes. Is this something that Baker Tilly can help us with?
   Yes, we can prepare and maintain a reporting requirement matrix customized to your company’s specific needs and provide periodic updates ahead of each reporting cycle.