Expensing of Exploration and Development Costs, Oil and Gas

Expensing of costs associated with exploration and development refers to the ability of some extractive industries to deduct these costs fully 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 may fully expense 70 percent of their IDCs, but are required to capitalize the remaining 30 percent and recover them over a 60-month period.