Calculating marginal well credit

IRS announces natural gas reference price for 2017 tax returns

Due to the new guidance provided in IRS Notice 2018-52, energy taxpayers can now calculate the marginal well credit for natural gas production on 2017 tax returns.

The Internal Revenue Service notice, released on May 29, 2018, announced a reference price for natural gas of $2.17 and the associated tax credit of $0.51 per mcf. These amounts are applicable for taxpayers wishing to claim the marginal well credit (MWC) for 2017 tax returns. The notice also gave the inflation adjustment factor of 1.2518, which is used to calculate to the phaseout limit when determining the MWC. IRS Notice 2018-52 only references the MWC for natural gas producing properties since the credit is currently not available for oil.

Download IRS marginal well credit on 2017 tax returns

Additional considerations

There are other important components and qualifications to the MWC that should be considered and accounted for properly when calculating the credit.

Only domestic wells qualify for the MWC.
Taxpayers must have an operating interest in the well to claim the MWC.
Taxpayers cannot claim the MWC if they are already claiming the nonconventional credit per IRC 45K.
If there is a short tax year, the credit limitations will be applied on a pro-rated basis
Form 8904 – Credit for Oil and Gas Production From Marginal Wells is the form to use to show the marginal well credit for years beginning in 2016 and onward.
The MWC is a general business credit (GBC) and thus only available to offset regular tax.
The credit has a carryback period of 5 years and a carryforward period of 20 years.