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Section 43 Enhanced Oil Recovery Credit Effective for Costs Paid or Incurred in 2016 Tax Years -- 10-Aug-2016

The IRS published Notice 2016-44 in July 2016 as required by Section 43(b)(3)(B). Notice 2016-44 states that for purposes of the Section 43 enhanced oil recovery (EOR) credit the average domestic first purchase price per barrel of oil (reference price) for the 2015 calendar year is $44.39. That amount does not exceed $28 multiplied by the inflation adjustment factor (IAF) of 1.6464 for the 2015 Calendar Year, $46.10. Therefore, there is no phase-out of the EOR credit for qualified costs paid or incurred in tax years beginning in calendar year 2016. The credit is figured as 15% of such qualified costs. The IRS therefore plans to issue a new revision of Form 8830, Enhanced Oil Recovery Credit, for filing with tax returns for tax years beginning in 2016. 

Taxpayers receiving the credit from partnerships and other pass-through entities with 2016 calendar year tax years also will be able to claim the credit, on their 2016 tax returns, on Form 3800, General Business Credit, without having to file Form 8830. Taxpayers receiving the credit from partnerships and other pass-through entities with fiscal years ending in 2017 will be able to claim the credit on their 2017 tax returns on Form 3800 without having to file Form 8830. 

The credit has been fully phased out and not effective for tax years beginning in 2006 through 2015, inclusive. Therefore, note that costs paid or incurred in 2016 on or before the end of a taxpayer’s fiscal year beginning in Calendar Year 2015 do not qualify, but expenses paid or incurred in 2017 on or before the end of the taxpayer’s fiscal year beginning in 2016 do qualify for the credit. Note also that such costs paid or incurred in one tax year for depreciable property not placed in service until the following tax year are properly taken into account for the EOR credit for the tax year in which they were paid or incurred, not the tax year in which depreciation begins.

Once information is available, around March 2017, to determine if the credit will be effective for tax years beginning in 2017, the IRS will announce that at irs.gov/form8830 and via other means.