New Tax Bill Lets Oil and Gas Companies Deduct More Drilling Costs Starting 2026

The "Promoting Domestic Energy Production Act" tweaks the tax code to change how oil and gas companies calculate their income. Basically, it lets these companies deduct more of the costs associated with drilling, which could mean a lower tax bill for them.

Drilling Down into the Tax Code

This bill focuses on something called "intangible drilling and development costs." Think of these as expenses that don't have a physical form (like labor, fuel, or repairs used in drilling) but are crucial for getting oil and gas out of the ground. The bill changes Section 56A(c)(13) of the Internal Revenue Code, specifically how these costs impact a company's "adjusted financial statement income" – a key number for calculating taxes.

• The bill says companies can deduct depreciation on equipment (Section 167) and expenses directly related to drilling (Section 263(c)) up to the amount they deduct for their regular taxable income. (SEC. 2.(A))
• It also tells companies to ignore depreciation and depletion expenses on their financial statements that are related to intangible drilling costs. (SEC. 2.(B)(i))

Real-World Rollout

These changes kick in for tax years starting after December 31, 2025. So, what does this mean in practice? Imagine an oil company, "Roughneck Drilling." They spend a bunch on labor, fuel, and repairs to get a well going. Under this new law, they can write off more of those costs when figuring out their taxes. This could free up cash for Roughneck to invest in more drilling, hire more workers, or even just keep more of their profits.

Potential Perks and Pitfalls

On the plus side, this could encourage more domestic energy production. More drilling could mean more jobs in the oil and gas sector and potentially more investment in the industry. There's also a chance (though it's not a sure thing) that this could lead to lower energy costs for consumers down the line.

However, there are potential downsides. Companies might try to inflate those "intangible" costs to get bigger tax breaks. Also, more drilling could raise environmental concerns, depending on where and how it's done. It is important to note that the bill does not address how to mitigate those potential downsides.

The Big Picture

This bill is part of a larger debate about how to balance energy production, economic growth, and environmental protection. It sits alongside existing tax laws and regulations that govern the oil and gas industry. The long-term effects will depend on how companies respond to these new tax rules and how the government monitors their implementation.