Article
Workover and recompletion severance tax credits for Utah oil and gas companies
Nov. 11, 2020 · Updated Sept. 29, 2022 · Authored by Marty Tschida
On March 3, 2020, the Utah Department of Natural Resources and Division of Oil and Gas Mining (DOGM) released an updated notice regarding changes to the severance tax credit program and processes for filing under Utah Code Section 59-5-102 (7). The notice is intended to provide incentives for production enhancement workovers and recompletions on oil and gas wells for Utah oil and gas companies.
These incentives can provide substantial severance tax credits to offset Utah severance tax liability.
Background
The original legislation under House Bill 389, effective May 14, 2019, amended the Utah code to require certification from an independent CPA. After subsequent review and deliberation, it was determined that the bill in its current form didn’t align with professional CPA standards.
As a result, the Utah legislature revisited House Bill 389 and approved House Bill 1003 in its place on Sept. 23, 2019, to modify the CPA provisions to be in line with professional standards.
The amended provisions allowed for independent verification by a CPA on the accuracy and validity of workover and recompletion costs, memorialized through the issuance of an agreed-upon procedures (AUP) report, as established by the DOGM. The AUP report is then meant to accompany a taxpayer or company’s filings to the DOGM to claim the tax credit.
What’s the severance tax credit?
The severance tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability or expense related to its production from qualifying wells for Utah oil and gas companies. This often underused opportunity to reduce a company’s tax burden can offer significant tax savings to those that participate in qualifying activities attributable to cost incurred on a company’s existing well base.
How much can a taxpayer save?
The maximum allowed tax credit per taxpayer, per well during a calendar year is limited to the lesser of 20% of eligible workover expenditures or $30,000. The taxpayer may claim the tax credit in the third quarter after completion of the work upon determination and notification from the DOGM.
Which activities qualify for the credit?
To qualify for the credit, companies must prove they’re engaging in qualified production enhancement, recompletion, conversion to injection, or repair well activities, summarily described as workover costs.
Related sections
The information provided here is of a general nature and is not intended to address the specific circumstances of any individual or entity. In specific circumstances, the services of a professional should be sought. Tax information, if any, contained in this communication was not intended or written to be used by any person for the purpose of avoiding penalties, nor should such information be construed as an opinion upon which any person may rely. The intended recipients of this communication and any attachments are not subject to any limitation on the disclosure of the tax treatment or tax structure of any transaction or matter that is the subject of this communication and any attachments.