IRS Announces Marginal Well Credit

The Internal Revenue Service (IRS) recently issued Notice 2019-37, which announced that the marginal well credit (MWC) on qualified natural gas production from qualifying wells would be $0.00 per mcf for tax years beginning with calendar year 2018.

For the purpose of this credit, marginal production is defined as domestic natural gas produced during any taxable year from a property that is producing not more than 15-barrel equivalents (90 mcf) per day; a well from which substantially all of the production is from “heavy oil”; or a well that has average daily production of not more than 25-barrel of oil equivalents and produces water at a rate of not less than 95% of total well effluent.  In addition, only the first 1,095 barrel equivalents produced during the taxable year will qualify for the MWC.  This maximum amount is proportionately reduced for a short tax year or in the case of a well that is not capable of production each day of the tax year.

To claim the credit, the taxpayer must own an operating or working interest in the qualified marginal well to which the credit relates.  If the well has more than one owner and the production exceeds the daily average limits discussed above, the production attributable to an owner is determined based on the owner’s revenue interest in the production to the aggregate of all operating owners’ revenue interest.  There are no limits on the number of qualified marginal wells on which a taxpayer can claim the MWC.

The MWC is limited to only offsetting a taxpayer’s regular income tax liability.  The credit cannot reduce a taxpayer’s regular tax liability below their alternative minimum tax liability.  However, any amount of credit that is limited and not used can be carried back 5 years and forward up to 20 years.