The R&D Tax Credit for the Oil & Gas Industry
Cashing in on Innovation: How R&D Tax Credits Can Energize Oil & Gas Companies
As a stakeholder in the oil and gas industry, you’re constantly adjusting to new marketplace conditions, technologies and changing environmental regulations. Whether your company is large or small, a producer or a supplier, there’s a good chance you’re continuously engaging in research and development (R&D) activities – even if you don’t realize it.
Given the above, there’s a critical financial tool at your disposal that may not be on your radar: the R&D tax credit. This credit is designed to spur innovation and it’s available to companies that meet certain qualifications.
Understanding the R&D Tax Credit
The R&D tax credit, formally known as the Research and Experimentation Tax Credit, was first introduced in 1981 to incentivize businesses to invest in innovation within the U.S. Over time, the tax credit has been expanded and made permanent, becoming a vital tool for companies to offset their research and development costs.
For the oil and gas industry, companies developing new or improved products, processes or software may qualify for the R&D tax credit. It’s not just about creating new drilling techniques or developing groundbreaking technology. Improvements in existing methods, techniques and processes also qualify as R&D activities.
Real-Life R&D in Oil & Gas
- Developing Improved Drilling Techniques: These activities may qualify if you’re experimenting with methods to increase drilling efficiency, such as developing advanced drilling fluids or optimizing drilling patterns.
- Enhancing Recovery Methods: Techniques to improve recovery, such as enhanced oil recovery (EOR) methods or experimenting with nanotechnology in recovery, can be considered eligible R&D activities.
- Creating Environmentally Friendly Technologies: Efforts to reduce the environmental impact of your operations, such as developing carbon capture and storage methods or optimizing water usage in hydraulic fracturing, may also qualify.
- Advancing Safety Measures: Research focused on improving safety protocols or creating more reliable safety equipment could be a qualifying activity.
- Designing Superior Exploration Technologies: If you’re working on creating or improving seismic imaging techniques or other exploration technologies, this is a potential R&D activity.
Realizing the Benefit
To claim the R&D tax credit, your company must demonstrate that it performs qualifying activities. Generally, these activities must involve eliminating technical uncertainty, involve a process of experimentation, be technological in nature and be intended to develop a new or improved business component.
The financial impact can be substantial. For example, a company with $1 million in qualifying R&D expenses could receive up to $220,000 in federal tax credits. And that’s not including potential state credits, which can further boost savings.
The biggest challenge for oil and gas companies may be identifying and documenting qualifying activities. Companies often overlook activities they consider to be routine or part of their daily operations. But these activities, such as process improvements or problem-solving related to drilling or extraction techniques, might qualify for the R&D tax credit.
Working with a qualified tax professional or an advisory firm experienced in the oil and gas industry can help you determine which activities qualify and how to document them properly. This effort can pay off significantly, reducing your tax burden and providing much-needed funds to reinvest in further innovation and growth. Contact an Adams Brown advisor if you have any questions about R&D qualifications.