On March 3, 2020, the State of Utah Department of Natural Resources and Division of Oil and Gas Mining (DOGM) released an updated notice regarding changes to the severance tax credit program and processes for filing under Utah Code Section 59-5-102 (7). The notice is intended to provide incentives for production enhancement workovers and recompletions on oil and gas wells for Utah oil and gas companies.
These incentives can provide substantial severance tax credits to offset Utah severance tax liability.
The original legislation under House Bill 389, effective May 14, 2019, amended the Utah code to require certification from an independent certified public accountant (CPA). After subsequent review and deliberation, it was determined that the bill in its current form didn’t align with professional CPA standards.
As a result, the Utah legislature revisited House Bill 389 and approved House Bill 1003 in its place on September 23, 2019, to modify the CPA provisions to be in line with professional standards.
The amended provisions allowed for independent verification by a CPA on the accuracy and validity of workover and recompletion costs, memorialized through the issuance of an agreed-upon procedures (AUP) report, as established by the DOGM. The AUP report is then meant to accompany a taxpayer or company’s filings to the DOGM to claim the tax credit.
What Is the Severance Tax Credit?
The severance tax credit is a dollar-for-dollar tax savings that directly reduces a company’s tax liability or expense related to its production from qualifying wells for Utah oil and gas companies. This often underutilized opportunity to reduce a company’s tax burden can offer significant tax savings to those that participate in qualifying activities attributable to cost incurred on a company’s existing well base.
How Much Can a Taxpayer Save?
The maximum allowed tax credit per taxpayer, per well during a calendar year is limited to the lesser of 20% of eligible workover expenditures or $30,000.
A taxpayer may carry forward a tax credit allowed for the next three calendar years if the tax credit exceeds the taxpayer's tax liability under this part for the calendar year in which the taxpayer claims the tax credit.
Which Activities Qualify for the Credit?
To qualify for the credit, companies must prove they’re engaging in qualified production enhancement, recompletion, conversion to injection, or repair well activities, summarily described as workover costs. Costs for repairing a well are acceptable for a credit only when the workover is to specifically repair damaged casing or liner. Work performed to repair equipment in a well, or a workover activity, which would be considered routine maintenance, is not eligible for a credit.
What are the Next Steps to Apply?
The application process consists of four main steps.
- Complete procedures and gather documentation. Perform procedures in the DOGM’s AUP agreement, including all necessary filings and forms for a particular well for which you’re seeking a tax credit.
- Get CPA verification. Once the scope of the potential credit is outlined along with the required supporting documentation, filings, and forms, engage a CPA to perform and issue a report for the agreed-upon procedures verifying the accuracy and validity of the associated costs, dates when the workover was commenced, and completed 14-digit API number for the well.
- Submit the required forms. Forms should be given to the DOGM along with the CPA report for approval.
- Apply for a tax credit certificate. Once approval has been granted by the DOGM, apply to the Utah Governor Office of Energy Development for a tax credit certificate that includes the amount of your eligible costs during the calendar year and the total anticipated amount of your tax credit.
It’s worth noting that significant planning should go into this process. Applicants should consider analyzing the projected inflows from added production and outflows for costs in performing the workover as well as costs necessary in obtaining the credit. In addition, they should be prepared to do significant documentation to successfully claim the credit.
We’re Here to Help
Utah severance tax compliance is complex but can lead to significant refunds and credit-creation opportunities. For help navigating the impact of the related tax credits or to inquire about completing a severance tax review, contact your Moss Adams professional.