Expensing of Exploration and Development Costs, Oil and Gas


Energy - Fossil Fuels

Subsidy Type

Tax Expenditure

Committees of Jurisdiction

Senate Finance Committee

$1,400 FY 16 Budget Score (in mil.)
$14,000 FY 16-25 Budget Score (in mil.)

Expensing of costs associated with exploration and development refers to the ability of some extractive industries to fully deduct these costs from their taxable income immediately or as they are incurred rather than waiting for those activities to generate income. This is an exception to general tax rules, which normally require companies to capitalize these costs (i.e. depletion or depreciation) over the life of the asset. Also known as Intangible drilling costs (IDC), IDCs include the costs of designing and fabricating drilling platforms as well as direct “wages, fuel, repairs, hauling, and supplies related to drilling wells and preparing them for production.” The IDC deduction allows qualified non-vertically integrated “independent” oil and gas producers to deduct from their taxable income all of these costs immediately, rather than over the usable life of the well, which can be 20 years or more. Integrated oil and gas producers are required to capitalize 30 percent of their IDCs and recover them over a 60-month period.

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