American Energy: A Key to Supply Security

Energy Market Perspective

U.S. Shale Remains a Strategic Supply Advantage
Global supply disruptions are once again highlighting the importance of U.S. shale. With U.S. oil production around 13.7 million barrels per day and crude exports reaching strong levels, American producers continue to play a key role in helping stabilize global energy supply.

For RIAs and advisors, the takeaway is clear: energy remains an important part of the broader market conversation. U.S. shale offers exposure to a sector tied to global demand, supply security, inflation sensitivity, and commodity price movements.

As clients look for opportunities beyond traditional equities and fixed income, domestic oil and gas may deserve renewed attention. The current environment reinforces the value of reliable U.S. production, disciplined operators, and energy assets that can benefit when global supply becomes constrained.

U.S. shale is not just a production story, it is a market resilience story. For investors seeking diversification, income potential, and exposure to real assets, oil and gas can remain a meaningful part of the portfolio discussion.

Ask the "Tax Guy"

This week, we want our EVP of Tax, Rex Gifford, to break down a more technical but important topic for oil and gas investors: How intangible drilling costs can impact alternative minimum tax calculations. Specifically, we’ll look at Form 6251, line 2t, and discuss when excess intangible drilling costs may become a tax preference item.

Q. For alternative minimum tax purposes, Form 6251, line 2t; assuming intangible drilling costs are being claimed as a current year deduction, describe the consequences and computation of excess intangible drilling costs becoming a tax preference item to be reported on line 2t.

A: Form 6251 is the IRS form titled Alternative Minimum Tax—Individuals. The Alternative Minimum Tax (“AMT”) is a parallel tax system designed to ensure that higher-income taxpayers with significant economic income pay a minimum level of federal income tax. It limits or disallows many deductions, exclusions, and tax preferences that are allowed under the regular income tax system (e.g., certain itemized deductions, accelerated depreciation, incentive stock option spreads, and tax-exempt interest from private activity bonds). Form 6251 recalculates taxable income under AMT rules to arrive at Alternative Minimum Taxable Income (“AMTI”). It then applies AMT exemption amounts (which phase out at higher income levels), computes tax at AMT rates (generally 26% or 28%), and compares the result (Tentative Minimum Tax) to the taxpayer’s regular tax liability. The taxpayer generally owes the higher of the two amounts. The excess (if any) is the AMT owed for the year.

Excerpt of Form 6251
The primary current year deduction generated by admission to a oil and gas drilling fund is intangible drilling costs (“IDCs”).As a reminder, IDCs are expenses for items with no salvage value in oil, gas, or geothermal well drilling/development (e.g., labor, chemicals, mud). Under IRC Section 263(c), taxpayers (generally non-integrated producers) can elect to deduct them currently for regular tax purposes rather than capitalize and amortize them. The election to amortize the IDCs is on a straight line basis over a sixty month period pursuant to the provisions of IRC Section 59 (e). Do not make this adjustment for costs where you elected the optional 60-month write-off under § 59(e) for regular tax (this avoids the preference entirely).

For individuals currently deducting IDCs, the IDCs could become a tax preference item for the purposes of computing AMTI. This excess IDC amount would be included on Form 6251 line 2t. Per the Form 6251 instructions, the computation is made as follows:

• Compute the IDC preference as if the exception did not apply.
• Complete Form 6251 through line 3 (including that preference; treat certain other lines as zero if specified).
• If the preference amount exceeds 40% of the total of lines 1–3 (as computed), enter only the excess on line 2t.
• Otherwise, enter zero on line 2t (full benefit of the exception).

IRC Section 613A created an exemption for independent producers and royalty owners. For independent producers, this exemption, generally avoids this IDC preference add-back. Large amounts of other alternative minimum tax preference items could trigger the requirement to include excess IDCs on Form 6251 line 2t.

The response to this week’s question is very technical in nature. This question was selected for the purpose of identifying possible consequences should proper planning and potential modeling not be considered when electing to participate in an oil and gas drilling offering.

Have a tax question you’d like covered in a future issue? Email it to theupside@kingoperating.com.

DISCLOSURE: For educational purposes only. Not tax, legal or accounting advice. Please consult your tax professional before making any investment or tax-related decisions

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