August 24, 2021

2021 Enhanced Oil Recovery US Tax Credit

On August 9, 2021, the Internal Revenue Service (“IRS”) released Notice 2021-47, which appears in IRS Bulletin No. 2021-32. This notice announces the inflation adjustment factor and phase-out amount for the enhanced oil recovery (“EOR”) credit under Section 43 of the Internal Revenue Code of 1986, as amended (the “Code”), for taxable years beginning in the 2021 calendar year. As described below, under Notice 2021-47, the EOR credit for qualified costs paid or incurred in 2021 is the full 15 percent (and is determined without the phase-out for crude oil price increases). 

Section 43 of the Code provides for a tax credit for certain EOR project costs incurred in the United States. Under Section 43(a) of the Code, the EOR credit for any taxable year is 15 percent of a taxpayer’s qualified EOR costs for such year. The 15 percent, however, is reduced in certain situations where the prior year reference price exceeds, by a certain amount, $28 multiplied by the inflation adjustment factor for the prior year. 

Because the 2020 reference price ($37.07) does not exceed $28 multiplied by the 2020 inflation adjustment factor (1.7849) ($49.9772), the Section 43 credit for qualified costs paid or incurred in 2021 is the full 15 percent. This is a change from 2019 and 2020, when the credit was fully phased out. Based on 2021 crude oil prices, a potential 2022 Section 43 EOR credit ought to receive careful forecasting consideration. 

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