tax reform: impact on oil & gas operations · uncertainty exists regarding unadjusted basis...
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Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 2
Tax Reform
Legislative & Industry Updates
Copyright © 2018 Deloitte Development LLC. All rights reserved. 3
Legislative Update
Topic Observations
General Observations – 2017
Tax Reform Act (P.L. 115-97)
(“The Act”)
• Budget reconciliation was used as the process to move tax reform legislatively, which brought with it inherent advantages and disadvantages.
• Temporary nature of the individual tax provisions in particular may create planning challenges in the future.
• Future election results may drive changes to The Act even more quickly.
• Expedited timeline for passage of The Act will likely lead to further legislative and regulatory changes.
“Fixing” the new law – three
main paths
• Technical Corrections
• Must be truly technical (conforming changes, etc.) that reflect the clear intention of the drafters and the staff at the Joint Tax Committee.
• Generally must have sign off from Treasury, Joint Committee on Taxation, GOP Ways and Means, DemWays and Means, GOP Senate Finance Committee and Dem Senate Finance Committee, an unusually difficult barrier this time around.
• By definition, the items should not have any revenue impact, so therefore need a vehicle that can pass with at least 60 votes in the Senate.
• Substantive legislative fixes
• If they have a revenue impact, they could – in theory – be passed via budget reconciliation (and only 51 Senate votes); but that requires an FY19 budget resolution authorizing tax reconciliation, and that may not happen.
• Treasury guidance / rulemaking
• Treasury is likely to be highly motivated to provide the smoothest possible implementation; expect them to use their regulatory authority to the maximum extent possible.
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Key consideration about the new Tax Act
What is the
impact on our
ability to use
attributes
(e.g., foreign
tax credits, net
operating
losses)?
What is
the impact
on our
effective
tax rate?
What factors
cause
effective
tax rate
volatility?
Does this
change the
way we think
about our
legal entity
structure?
What is
the impact
on our
cash tax
position?
How does this
impact our
treasury
considerations
and use of
cash overseas?
What impact
does this have
on our cross-
border
payments?
Do any of the
changes impact
our policies
around employee
compensation
and benefits?
How does
this impact
our M&A
strategy?
What
technology
changes are
needed to
accommodate
additional data
requirements?
Copyright © 2018 Deloitte Development LLC. All rights reserved. 5
Oil & Gas Overview
Historically targeted O&G specific provisions unchanged
Important items unchanged include:
• Deduction for intangible drilling costs• Percentage depletion• Recovery of geological and geophysical costs• Designation of certain natural resource-related activities as generating qualifying income under the publicly traded partnership (“PTP”) rules
• Exception to passive loss treatment for certain working interests
• LIFO
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Description Prior Law The Act Considerations
Leasehold Costs
Costs to acquire O&G leases are generally capitalized and recovered through depletion (611).
Independent producer & royalty owner is allowed to use percentage depletion, and is generally allowed to deduct the greater of cost or percentage depletion.
TJCA does not specifically address O&G related leasehold cost rules.
Absent unanticipated changes, historical treatment of these costs continue.
Tax Reform – Oil & Gas Overview
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Description Prior Law The Act Considerations
G&G Costs Generally capitalized & amortizable over 24 months (167(h)).
Major IOCs amortize over 7 years.
Foreign G&G capitalized and recovered through cost depletion.
Not specifically addressed. Absent unanticipated changes, historical treatment of these costs continue.
Tax Reform – Oil & Gas Overview
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Description Prior Law The Act Considerations
Intangible Drilling Costs
Taxpayers may elect to deduct currently. If no election, recover through cost depletion.
If properly elected, taxpayer can make an annual election to capitalize some or all of the deductible IDC, which is recovered over 60 months (§
59(e)).
IOCs capitalize 30% & amortize over 60 months.
The deductibility of IDC has been retained under section 263(c).
Section 291(b) has been retained, reducing the amount of IDC that IOCs can expense by 30%.
Though corporate AMT has been repealed, § 59(e) capitalization
appears to be available to corporations.
The statutory language modifying the AMT rules did not remove current law § 59(e). This provision allows
annual flexibility in determining the amount of IDC that an E&P company capitalizes or deducts.
Tax Reform – Oil & Gas Overview
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Description Prior Law The Act Considerations
Marginal Well Credit
Producers may claim a $3-per-barrel credit (adjusted for inflation) for the production of crude oil and a 50-cents-per-1,000-cubic-feet credit (also adjusted for inflation) for the production of qualified natural gas.
Unchanged. Consider projections of credit for the 2017 and 2018 tax years.
Potentially $0.51/Mcf of qualified natural gas production in 2017.
Credit may be fully phase-out for oil and natural gas in 2018.
Enhanced Oil Recovery Credit
Taxpayers may claim a credit equal to 15 percent of enhanced oil recovery (EOR) costs.
Unchanged. Continue to file certifications with the state.
Tax Reform – Oil & Gas Overview
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Description Prior Law The Act Considerations
199 Deduction Up to 9% deduction for certain income attributable to domestic production activities.
The ACT repeals the DPAD for tax years after 2017.
199 repeal will impact most businesses.
Research andExperimentation(R&E) Expenditures
Section 174 provides an option to immediately deduct oramortize R&E relatedexpenses over 5years.
Unchanged existing rules would continue to apply; however, section 174 expenditures paid or incurred in taxable years beginning after Dec. 31, 2021, are subject to capitalization and amortization over 5 years for research conducted within the US and 15 years for research conducted outside the US.
Change applied on a cutoff basis.
With the repeal of corporate AMT, this credit could become more relevant for companies that could not historically benefit from the credit due to their AMT profile.
Consider interplay between expenses reclassified as Section 174 expenditures and expenses capitalized under Section 59(e).
These rules do not apply to expenditures for the acquisition or improvement of land, or for expenditures paid to ascertain the existence, location, extent, or quality of mineral deposits, including oil and gas.
Tax Reform – Oil & Gas Overview
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 11
Domestic Oil & Gas Operations
Tax Reform Considerations
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Description Prior Law The Act Considerations
TopCorporateRate
35% 21%
Also reduces the 80% Dividend Received Deduction (“DRD”) to 65%, 70% DRD to 50% (preserving 2017 effective tax rate from such dividends).
The reduction in the corporate rate is generally favorable to all corporate taxpayers.
The reduction in the corporate tax rate reduces the US federal income tax liability but also the value of tax attributes.
As many companies with global E&P operations often have significant excess FTCs due to the high tax rates in the foreign jurisdictions, the lowering of the tax rate in the U.S. may exacerbate this situation.
Flow-through portfolio companies to consider corporate vs. partnership treatment taking into consideration effective rates (including potential future change in law), deductibility of state income taxes, operational concerns, exit considerations, and impact on IRR.
Consider the consequences of the corporate tax rate change on ASC 740 items such as deferred balances.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Pass-ThroughBusiness Income
Taxed at owner’s tax rate.
20% deduction for qualified business
income through 2025, limited to greater of
a) 50% of W-2 wages, or b) 25% of W-2
wages + 2.5% of the unadjusted basis,
immediately after acquisition, of all
qualified property.
Qualified business income (“QBI”) means
items of income, gain, deduction, and loss
with respect to a taxpayer's qualified
businesses (must be income effectively
connected with a US trade or business).
Qualified business income excludes:
• Specified investment-related items (e.g.,capital gains/losses, dividends, interest income).
• Reasonable compensation paid to the taxpayer.
• Guaranteed payments for services.
QBI includes dividends from a REIT,
patronage dividends from a cooperative,
and qualified PTP income, but generally
excludes investment-related gain,
deductions, or loss.
In the case of a partnership or a S
corporation, applies at the partner or
shareholder level.
Flow-through portfolio companies to consider corporate vs.
partnership treatment taking into account effective rates (including
potential future change in law), deductibility of state income taxes,
operational concerns, exit considerations, and impact on IRR.
For flow-through portfolio companies, certain partners may be
eligible for the reduced rate for QBI. This may require additional
reporting to be put in place as early as the start of 2018.
Consider the impact of leverage on the ability to manage the
income threshold exception.
Deduction is an adjustment reducing adjusted gross income
(“AGI”) to get to taxable income.
Consider impact of tax rate used to determine tax distributions.
Uncertainty exists regarding unadjusted basis calculation, including
whether depreciation is section 704(b) or tax, basis to be used for
assets acquired through a like-kind exchange or contribution, and
whether step-ups are included.
Consider potential restructuring of Management Co. with respect to
QBI activities (e.g., wages of employees incurred elsewhere in the
structure may need to be moved).
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Net Operating Loss (NOL)
Available for 2-year carryback and 20-year carryforward.
Generally eliminates NOL carryback
and provides an indefinite
carryforward. Limits current
deduction to 80% of taxable income
(before the dividends paid deduction)
for losses arising after 2017. Unused
NOLs will be carried forward.
NOL from pre-2018 tax years may be able to offset 100%
of taxable income; however, NOLs generated in 2018 or
later will be subject to an 80% limitation. Need to balance
value of pre-2018 NOL vs. Post-2017 deductions.
Though corporate AMT is repealed beginning 2018, need to
consider implications of full expensing of IDC in final year
of AMT regime.
Many costs incurred in the upstream space historically
qualified as SLLs. No longer avenue to carryback 10 years.
In flow-through setting, federal effective tax rate of 4.2%
when 80% of taxable income is shielded by NOL (21% *
20% = 4.2%).
Consider proper treatment of valuation allowance for
companies with currently with a valuation allowance
against NOL DTA for financial reporting purposes.
Tax Reform – Oil & Gas Considerations
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The Act requires a US shareholder owning at least 10 percent of the vote of a foreign subsidiary (where there is at least one US corporation that is a 10 percent voting shareholder) to add to its subpart F income the shareholder’s pro rata share of the foreign subsidiary’s net post-1986 historical E&P, as determined as of November 2, 2017, or December 31, 2017, whichever is higher. This income is to be reported as of the foreign subsidiary’s last tax year beginning before 2018, and is taxed at one of two rates: (1) 15.5 percent for E&P held as cash or cash equivalents; and (2) 8 percent for all other E&P.
Should the § 965 dividend (net of the DRD) should be treated as taxable
income for all purposes?
Can any NOL pre- § 965 in 2017 can be elected to be excluded from the computation using the § 965(n)
election?
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
AMT Alternative regime that impacts many corporate and individual taxpayers with O&G investments. Special tax preference items for upstream taxpayers.
Corporate AMT after 2017 has been repealed.
Would continue to allow the prior year minimum tax credit to offset the taxpayer’s regular tax liability for any tax year.
Unused credits are refunded: 50% of remaining credit each year 2018-2021.
While AMT impacts O&G taxpayers in all sectors of the industry, it has historically been especially relevant for upstream companies due to the IDC preference item. No longer need to calculate.
Impact to financial statements with the release of the valuation allowance on use of credits.
Need for partnerships to still calculate Excess IDC and other AMT amounts as a result of individual AMT not being repealed.
How to maximize use of AMT credit against regular tax liability.
Need to maintain AMT and ACE books?
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Tangible Cost
Recovery
Taxpayers generally
recover costs under
the Modified
Accelerated Cost
Recovery System
(MACRS).
Full expensing allowed in year one for
“qualified property” (generally tangible
personal property) placed in service
after September 27, 2017 and before
January 1, 2023. This provision is
phased down by 20% per calendar year
beginning in 2023. The phase down
begins in 2024 for assets with certain
longer production periods as well as
certain aircraft.
No “original use” requirement for the
property, but other limitations apply.
For qualified property placed in service
during the tax year ending after
September 27, 2017, taxpayers may
elect to utilize 50% bonus depreciation
as opposed to 100% bonus
depreciation.
The Act makes no changes to section
168(k)(7), which permits a taxpayer to
elect out of bonus depreciation on an
asset-class-by-asset-class basis.
Modeling:
• Update for immediate expensing of qualified property (generally new and used tangible personal property (i.e., not real estate), which may include purchase price allocable to such property in step-up transactions).
• Eligible to elect out of 100% expensing (reverting to either 50% or 0% expensing for 2017 and 0% for after 2017, then follow existing tax depreciation rules). If 100% deduction would result in an NOL, then further consideration may be advisable in order to evaluate whether 50% election (only in 2017) or electing out (0%) could be more beneficial than creating an NOL that would be limited going forward. However, residual depreciation post-2021 would reduce the interest expense limitation.
• Future “non step-up” acquisitions may result in little to no tax basis in property & equipment of acquired companies due to 100% expensing.
Could create additional ordinary income recapture in pass-through structure upon exit due to allocation of value to zero tax basis property.
Additional importance upon purchase price allocation methodology at acquisition and exit.
Mechanism to change existing assets to ADS is uncertain. The options are change in method, change in use, or change in useful life. It appears the intent was change in use, which generally requires prospective application.
The Act also repeals the ability to claim prior year minimum tax credits in lieu of bonus depreciation.
Consider impact to taxable income and optimizing FDII and GILTI deductions.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
InterestExpense
Subject to certain limitations (e.g., certain related party interest), corporations may generally deduct interest expense.
Net business interest expense limited to 30% of
adjusted taxable income (“ATI”).
ATI is computed without regard to (i) the 20%
deduction for certain pass-through income, (ii)
the net operating loss deduction, and, prior to
2022, without taking into account depreciation,
amortization, and depletion. For 2022 and
after, ATI is computed with regard to
depreciation, amortization, and depletion
(EBITDA before 2022, EBIT thereafter).
Indefinite carryforward for disallowed amount.
The interest deduction limitation does not apply
if the taxpayer’s 3-year annual average gross
receipts does not exceed $25 million
(aggregation rules apply).
At taxpayer’s election, limitation does not apply
to interest of a real property trade or business.
If election is made, ADS depreciable life must
be used for real property.
For partnerships and S corporations, the interest
expense limitation is generally computed at the
entity level.
Modeling:
• The manner in which interest expense is classified in order to properly
allocate interest into business interest and investment interest
expense. This will require interaction with portfolio company.
• Post-2021, electing out of bonus depreciation to preserve the interest
deduction.
Significant additional reporting requirements for partnerships
Consider the value of a sale leaseback if the buyer is not subject to
interest deduction limitations but the seller is.
It is unclear how disallowed interest expense carryforward amounts under
prior section 163(j) are treated. Guidance is being sought.
Consider ability to use production payments designed to fail debt rules to
favorably impact amount of net interest expense.
Consider impact of making 59(e) election on IDC passed-through above
partnership which has interest limitation.
Consider tax efficiency of current debt and whether to change capital
structure to optimize after-tax cost of capital.
Tax Reform – Oil & Gas Considerations
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I.R.C. § 163(j)(7)(B)
For purposes of this paragraph, the term "electing real property trade or business" means any trade or business which is described in section 469(c)(7)(C) and which makes an election under this subparagraph.
I.R.C. § 469(c)(7)(C)
Real property trade or business. For purposes of this paragraph, the term "real property trade or business" means any real property development, redevelopment, construction, reconstruction, acquisition, conversion, rental, operation, management, leasing, or brokerage trade or business.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Like-Kind Exchange
No gain or loss recognized forwide range of property held forproductive use or investment.
Different classes of propertyinclude (1) depreciable tangiblepersonal property; (2) intangibleor non-depreciable personalproperty; and (3) real property.
The Act limits the scope of like-kind exchangenonrecognition treatment to real property not heldprimarily for sale. Thus,personal property thatpreviously qualified fornonrecognition treatmentno longer qualifies underthe Act. The provisiondoes not apply to anyexchange where theproperty disposed of orreceived in the exchangeby the taxpayer wasdisposed of or receivedbefore December 31, 2017.
Many O&G companies routinely use like-kind exchanges in connection with acquisition and disposition transactions. Operating and non-operating interests in O&G reserves have generally qualified as real property under these rules, so these transactions should largely remain unscathed by the narrowing of this provision.
Any personal property included in the exchange, however, would not qualify. As it is common for a transaction to include a mixture of real and personal property, the value of like-kind exchange planning on prospective transactions will obviously be impacted by the amount of personal property included in a transaction involving both property types.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Technical Termination ofPartnership
Generally, a partnership terminates (and tax year ends) if, within a 12-month period, there is a sale or exchange of 50% or more of partnership profits and capital.
Technical terminations of partnerships are
repealed. Thus, a partnership would be
treated as continuing even if greater than
50% of the total capital and profits
interests are sold or exchanged; new
elections would not be required or
permitted.
The repeal is effective for partnership
taxable years beginning after
12/31/2017. As a result, partnerships
with non-calendar taxable years will
continue to be subject to the technical
termination rules for some portion of
2018.
Need to consider more carefully the selection of elections and methods of a new partnership.
Acquirers of a majority partnership interest should understand what elections and methods those target partnerships have in place, knowing that the acquisition itself would not create the technical termination and opportunity to choose new methods.
Creates additional purchase agreement considerations (e.g.,“straddle period” provisions for allocating partnership income as target partnership will not file a final pre-closing tax return).
Provides more flexibility on accrual of transaction costs in conjunction with closing the books or extraordinary items under section 706.
Modeling:
• Makes modeling an acquisition of existing partnership potentially more complex.
• Depreciation will no longer restart on MACRS property. Also, short year returns will no longer be required.
• No acceleration of certain income and adjustments (e.g.,deferred revenue and section 481(a) adjustments), which can have economic implications.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Executive Compensation
Code section 162(m) limitscorporate compensationdeductions for compensation paid to “covered employees” in excess of $1 million in a year.The limit includes exceptions for commissions and for“performance-basedcompensation” includingperformance-based bonus plans, stock options, and stockappreciation rights. Current IRS guidance defines “coveredemployees” as the CEO at theclose of the year and the threehighest-paid officers determined with reference to regulatory securities rules.
The Act expands the currentlimitation on deduction ofcompensation paid to “coveredemployees” under Code section162(m) by (1) eliminating theexclusions for commissions orperformance-based compensation,(2) expanding “covered employee” toinclude anyone serving as CFO orCEO at any point during the year, aswell as the three most highlycompensated officers as shown inSEC disclosures, and (3) providingthat status as a covered employeecontinues to apply if the person wasever a covered employee. The Actalso expands the definition of entitiescovered by the provision. The Act iseffective for tax years beginning after 2017, though it includes a transition rule for compensation paid pursuant to certain written binding contracts in place on November 2, 2017 which are not materiallymodified.
Companies may want to consider the impact of potentially lost deductions, identify situations where transition relief may apply, and reconsiderthe structure of compensation packages provided to covered employees. In addition, companies may want to consider the impact on deferred tax assets and the related income tax and financialaccounting implications.
Establish process for tracking “once covered employees” who are now “always a covered employees”.
Tax Reform – Oil & Gas Considerations
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Description Prior Law The Act Considerations
Carried Interest
Taxed as long-term investment income.
Effective January 1, 2018, a three-year holding period is required to claim long-term capital gains with respect to certain partnership interests received in connection with the performance of services (“applicable percentage interests” or “API”).
No grandfathering for investments held prior to enactment.
Is carried interest arrangement less attractive for PE clients with new three-year holding requirement for LTCG treatment?
Consider the reporting and recordkeeping requirements that would be required by having API and non-API holders.
Consider modifications to LPAs to reduce impact of three-year holding period requirement.
Be mindful of outside basis limitations and holding period/section 731(a) gain.
Consider distributions in kind to the GP to the extent an asset being sold has a holding period greater than 1 year but less than 3 years.
Because the carried interest holding period rules do not affect the treatment of QDI, consider leveraged recapitalizations when there is sufficient E&P and basis to absorb distribution, subject to new section 163(j) and reduced corporate rates.
Consider potential fee waiver allocations and distributions.
Tax Reform – Oil & Gas Considerations
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Description Expense Type Prior Law The Act
Meals, Entertainment, and Fringe Benefits
Client entertainment 50% deductible 100% non-deductible (ND)
Client meals 50% deductible Entertainment related – 100% NDBusiness related - 50% ND
Cafeteria subsidy & convenience of employer meals
Mix of 100% deductible & income inclusion
Mix of 50% deductible & income inclusion. 100% ND post 2025
De Minimis meals (meals for employee meetings)
Mix of 100% & 50% deductible 50% deductible
Employee recreation Mix of 100% & 50% deductible Mix of 100% deductible & 100% ND
Overtime meals Mix of 100% deductible & income inclusion
Mix of 50% deductible & income inclusion
Commuting fringe benefits
Mix of 100% deductible & income inclusion
Mix of 100% ND & income inclusion
Skyboxes & suites Mix of 50% & 100% ND 100% ND
Tax Reform – Oil & Gas Considerations
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Description Expense Type Prior Law The Act
Meals, Entertainment, and Fringe Benefits (cont.)
Pre-tax Transportation
Employer could deduct pre-tax transportation benefit not subject to tax by employee (e.g., up to $260/month for parking and mass transit)
Employer cannot deduct pre-tax transportation benefit not subject to tax by employee
Moving Expenses Employer could exclude from income employer-paid or reimbursed moving expenses for employees
US tax reform has repealed the exclusion from income tax for employer-paid or reimbursed moving expenses for employees (with an exception for members of the armed forces on active duty).Beginning January 1, 2018, employers should include in income moving costs paid on behalf of employees as well as any reimbursement for bicycle commuting expenses
Tax Reform – Oil & Gas Considerations
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 26
Domestic Oil & Gas Operations
Tax Reform Considerations – Building sustainable processes for new tax law
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Summary of Process Considerations
Tax AccountingImmediate need for revised calculations and reporting requirements.
Tax SystemsShort term need for technology support to meet new reporting requirements with pivot to longer term opportunity to enable sustainable processes for new calculations with expected emphasis on international and state calculations.
Data RequirementsNew tax law will change data needs in source ERP and other systems. Tax departments will need to inventory the needs and make appropriate changes to meet the new requirements. Clients will need to address these requirements in source financial systems, create new data models, and embed analytics for real time reporting.
Tax TransformationTax reform will add more momentum to the growing trend of alternative operating models andoutsourcing.
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 28
Domestic Oil & Gas Operations
Tax Reform Considerations - Multistate
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Interest Expense Limitation
• Increases AGI, so many states can be expected to follow.
• Applied at the entity level, therefore may impact the following:
− Entity level taxes
− Nonresident withholding
− Composite returns
• Carryforward of excess interest expense creates issues/opportunities because applied at the partner level.
• Immediate federal expensing – many states already decouple from bonus depreciation.
Pass-through Business Deduction
• State conformity to Internal Revenue Code (“IRC”) - Does state adopt the IRC “as currently in effect,” or as of a specific date that may lag new tax law?
• 20% domestic qualified business income (pass-through) deduction
− Does not reduce “Adjusted Gross Income” (“AGI”) so won’t impact states that start with AGI.
− States that start with “Taxable Income” may seek to decouple if deemed too great a revenue loss.
− Deduction applied at partner level, therefore may not impact the following:
◦ Entity level taxes
◦ Nonresident withholding
◦ Composite returns
Other State Conformity Items
• Transition tax:
− Individuals may not get dividend received deduction or subtraction for subpart F income.
− State may not spread transition tax over 8 years.
• GILTI.
• Repeal of technical terminations.
• ECI on the sale of a partnership interest.
• Carried interest.
• Business loss limitations.
• Compliance/potential additional disclosure.
Tax Reform Considerations – Multistate
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Pennsylvania 100% Expense Decoupling: Corporation Tax Bulletin 2017-02
• Requires addback of federal 100% expensing deduction under section 168(k).
• But provides NO DEPRECIATION OR OTHER RECOVERY until the property is sold or disposed.
• Reverses prior policy of allowing full recovery of 100% bonus in the year placed in service.
• May result in PA corporate tax being greater than federal tax.
− Example assuming $20 million of qualified property for section 168(k) deduction and 100% apportionment:
• FTI of $10 million X 21% = $2.1 million federal tax
• PA income of $10 million + $20 million = $30 million X 9.99% = $3 million PA tax
State Modeling
• State corporate tax rates can be significant. Consider the following:
− Iowa = 12%
− Pennsylvania = 9.99%
− Minnesota = 9.8%
− Illinois = 9.5%
− Alaska = 9.4%
− New Jersey = 9%
− California = 8.84%
• Differences between individual rates and corporate rates can be significant – AK 9.4% difference, PA 6.92% difference, IL 4.55% difference.
• Entity-level taxes (including net income taxes) are levied on partnerships in certain states.
• State modeling is complicated, and should consider each of the following:
− States where business is operating
− States where owners reside
− Credits for taxes paid to other states
Application of Corporation Tax Bulletin 2017-02
• This is representative of the many nuances through which states adopt or decouple from federal rules, causing unforeseen results.
• Does not apply for personal income tax purposes, which decouples from bonus but allows a regular depreciation deduction.
• Partnerships may need to report different information for corporate vs. individual partners.
Tax Reform Considerations – Multistate (cont.)
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 31
Domestic Oil & Gas Operations
Tax Reform Considerations – Financial Reporting
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Financial statement reporting considerations about the new Tax Act
• Effect of change in law generally recognized upon
enactment, certain prospectively effective provisions
recognized once effective
• Existing deferred tax assets and/or liabilities must be
remeasured for new rate and rules in the period of
enactment
• Current year taxes payable/refundable—after effective date,
no earlier than period that includes enactment date
• Consider the effect of the change in law on the indefinite
reinvestment assertion
• SEC staff accounting bulletin No. 118 (SAB 118) provides a
measurement period of 12 months from enactment to
complete accounting*
1. Recognize amounts for which accounting can be
completed
2. Recognize provisional amounts where accounting is
incomplete
3. Incomplete accounting, no amount recorded
*FASB did not object to non-SEC registrants applying (SAB
118)
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 33
Domestic Oil & Gas Operations
Appendix
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Client Meal Examples
Type of M&EExpenditure
Old Law Deductibility New Law Deductibility
Meal to celebrate deal/project closing 50% deductible 100% non-deductible assuming the purpose is entertainment
Meal with substantiation of business purpose other than entertainment
50% deductible 50% deductible
Meal with no substantiation of business purpose other than entertainment
50% deductible 100% non-deductible
Networking meal with non-client with substantiation of business purpose other than entertainment
50% deductible 50% deductible
Networking meal with non-client with no substantiation of business purpose other than entertainment
50% deductible 100% non-deductible
Copyright © 2018 Deloitte Development LLC. All rights reserved. 35
Employee Recreation Examples
Type of M&EExpenditure
Old Law Deductibility New Law Deductibility
Holiday party 100% deductible if non-discriminatory; 50% non-deductible if discriminatory
100% deductible if non-discriminatory; non-deductible if discriminatory
Sports leagues (e.g. softball league)
100% deductible if non-discriminatory; 50% non-deductible if discriminatory
100% deductible if non-discriminatory; non-deductible if discriminatory
Food at/after sports league game 100% deductible if non-discriminatory; 50% non-deductible if discriminatory
100% deductible if non-discriminatory; non-deductible if discriminatory
Employee “morale” events 100% deductible if non-discriminatory; 50% non-deductible if discriminatory
100% deductible if non-discriminatory; non-deductible if discriminatory
Counseling/mentor meals 100% deductible if non-discriminatory; 50% non-deductible if discriminatory (discrimination determined at level of each meal)
100% deductible if non-discriminatory; non-deductible if discriminatory (may consider treating as de minimis meal to obtain 50% deduction – need to consider frequency)
Cake to celebrate birthdays/anniversaries
100% deductible if non-discriminatory; 50% non-deductible if discriminatory
100% deductible if non-discriminatory; non-deductible if discriminatory (may consider treating as de minimis meal to obtain 50% deduction – need to consider frequency)
Tax Reform: Impact on Oil & Gas OperationsCopyright © 2018 Deloitte Development LLC. All rights reserved. 36
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