What the R&D Tax Credit Means for the Oil and Gas Industry

April 20, 2020

By Mark Bader

Technology is advancing at a rapid pace, especially in the oil and gas industry. As the industry seeks to expand the discovery of new sources of fuel and research alternative energy technology, new innovations are hitting the market at a pace never seen before.

To encourage development and innovation from companies in all industries, tax credits are available to businesses that invest in research and development. Currently, the R&D Tax Credit expired on December 31, 2013, leaving many businesses concerned about whether they’ll be rewarded for their research in the coming years. However, the tax credit can still be used when filing for 2013. Because the tax credit has been extended 15 times since its passage in 1981, many believe that it will be extended in 2014.

Oil and gas companies have a few options for determining how much of their research and development costs can qualify for the Tax Credit. Companies can claim up to 20 percent of R&D costs, but only after a series of complicated calculations and, sometimes, an external review by a third-party company. According to the Wall Street Journal, many firms opt to take a 14 percent deduction, which is less difficult to calculate.

Expenditures qualifying for the R&D tax credit cover a wide range but are often highly specific. You may deduct salaries paid to workers doing qualified research, payments to nonprofit organizations conducting research on your behalf and any supplies needed. An accountant who is well versed in the tax credit can help you determine exactly which expenditures qualify.

There is also some confusion over what exactly constitutes “research and development.” Many businesses think they have to be inventing a new product to claim the R&D tax credit, but this isn’t necessarily the case. Forbes suggests the credit exists to encourage the use of applied science, or “solving a customer’s problem or production issue using known scientific principles. “Problem solving on the shop floor, in the field, on the site, behind a computer—all may be eligible for the R&D tax credit.” According to Alliant Group, examples of innovations eligible for the tax credit include: development and testing of plug and abandonment solutions, waste water treatment solutions, refining issues, and drill design and improvements.

Companies should also remember that the Internal Revenue Service has listed the R&D tax credit as a “tier 1” issue as of 2007, meaning returns including this deduction are subject to increased scrutiny. Making sure your tax return is 100 percent accurate is essential when applying this credit.

Depending on the amount of research your business conducts, this tax credit could mean the difference between a profit and a loss at the end of the year. The R&D tax credit is especially beneficial for start-ups, who spend a significant amount of capital on new product development and process improvement.

Even though the R&D tax credit may be complicated to calculate, it could have a major financial impact on businesses looking to bolster their bottom line. This is especially true in the oil and gas industry, as subsidies to companies researching energy projects are much higher than other industries.

The added tax scrutiny means all companies must use extra caution when claiming this credit. Working with a qualified accountant or tax expert could keep the IRS away and save you a lot of money in the process.

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