On September 12, 2017, the Internal Revenue Service released Notice 2017-51, which announced the reference price for natural gas of $2.38 and the associated tax credit of $0.14 per Mcf. These amounts are applicable for taxpayers wishing to claim the marginal well credit (MWC) for 2016 tax returns. The notice also gave the inflation adjustment factor of 1.2332, which is used to calculate to the phase-out limit when determining the MWC.
The MWC originated from the American Jobs Creation Act in 2004. However, due to historical oil and natural gas prices in the US, the MWC has been unavailable for most of its existence. The credit is governed by Section 45I of the Internal Revenue Code (IRC).
The MWC is a production-based tax credit. The intent of the credit is to assist taxpayers with exploration and production activities when the prices for oil and gas are low.
IRS Notice 2017-51 gives the final pieces to assist taxpayers in calculating the MWC for natural gas on 2016 tax returns. Below is a high-level overview of the credit and key factors to consider when calculating the MWC.
Although IRS Notice 2017-51 clarified the reference price to use on 2016 tax returns (the 2015 reference price), the notice does not give a specific reference price to use for 2017 tax returns (the 2016 reference price).
The notice indicates that the method used to calculate the 2015 reference price will likely be similar for 2016; however, caution should be used when estimating other calendar year references prices until the IRS has provided more guidance.