Topic: Energy & Taxes
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What are intangible drilling costs? Why does the oil industry get to deduct these costs from their taxes?
Answer:
When energy companies drill they incur costs for things like site preparation and labor. No physical asset is received for these costs, and over time they have been termed as intangible costs. Typically, they represent 60 to 80 percent of the cost of the well – the remainder being the physical steel, pumps and casing that become part of the well. Companies have long had the option of deducting these costs in the year they are spent – similar to deductions enjoyed by other industries. For example, many industries are able to expense research labor and other costs under the research and development deduction, and computer software companies can deduct the costs of developing code. In fact, the administration has been promoting a provision to allow for the immediate expensing of all capital costs that meet certain thresholds.
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What role does the U.S. tax code play in oil and natural gas industry investment in America?
Answer:
Risk is an integral part of exploring for oil and natural gas. There's no guarantee that drillers will find commercially viable amounts of energy. Before companies begin drilling, they must invest large sums of money to lease areas for development (onshore and offshore) get the needed permits, procure the rig, hire workers and assemble the necessary equipment. Sometimes they find energy, sometimes they drill a dry hole.
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What do oil company earnings have to do with energy security?
Answer:
It’s important to acknowledge that America’s oil and natural gas industry is one of the world’s largest and most capital-intensive industries. Companies routinely invest billions of dollars each quarter into exploration, research, development and technology.
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What do oil companies do with their earnings?
Answer:
Earnings – what’s left after payrolls and other operating expenses are paid for – basically go two places. Of every dollar earned, 56 cents goes to shareholders and 44 cents goes to government in the form of income taxes. Shareholders include Americans with mutual funds, individual investments, pension funds and IRAs. Taxes at the national and state level help meet a number of public needs, including funding for roads, schools, parks and more.
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Our national debt is too high. Would increased taxes on oil and natural gas companies lower the deficit?
Answer:
Punitive tax increases on the oil and natural gas industry may provide short-term revenue, but they would undermine economic investment and cause the federal government to lose money in the longterm.
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Why should I care if taxes on “Big Oil” are raised?
Answer:
Because chances are pretty good you own a piece of an oil and natural gas company. Research shows nearly 50 percent of all corporate shares in these companies are held by public and private pension and retirement funds, including 401(k)s and IRAs. Individual investors own 20 percent, while financial institutions and asset management companies own 27 percent – totaling 97 percent. Less than 3 percent of the shares are owned by corporate officers and board members.
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How much do oil companies make on each dollar of sales, and how does that compare with other business and industries?
Answer:
Because integrated oil and natural gas companies are large, their earnings are large. What’s not often reported is that oil and gas company earnings actually are well in line with the U.S. manufacturing industry, averaging about 7 cents for every dollar of sales. The latest published data for the first quarter of 2012 shows the oil and natural gas industry earned 7.5 cents on the dollar in comparison with all U.S. manufacturing, which earned 8.9 cents for every dollar of sales. When looking at net profit margins, the U.S. oil and natural gas industry ranks 114 out of 215 industries.
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If the industry is getting tax deductions, doesn’t that mean they aren’t paying their fair share?
Answer:
Absolutely not. The U.S. oil and natural gas industry pays more than $86 million every day to the U.S. Treasury in rents, royalties and income tax payments. That’s more than $31 billion a year. In 2011, the effective income tax rate for the oil and natural gas industry averaged 40.6 percent, compared to just 25.1 percent for other S&P Industrial companies.
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Doesn’t the oil and natural gas industry receive special subsidies?
Answer:
No. The oil and natural gas industry does not receive targeted taxpayer subsidies or credits. It uses business tax deductions, like the one for intangible drilling costs, which are the same deductions used by other businesses and industries.
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Oil company profits are very high; are they paying their fair share in taxes?
Answer:
The fact is, the oil and natural gas industry’s income tax expenses as a percentage of net income (before income taxes) averaged 40.6 percent in 2011, compared to 25.1 percent for other S&P Industrial companies. U.S. oil and natural gas companies pay approximately $86 million to the U.S. Treasury in rents, royalties and income tax payments every single day.
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