Reg. § 1.43-1 The enhanced oil recovery credit—general rules.
(a) Claiming the credit
(1) In general The enhanced oil recovery credit (the “credit”) is a component of the section general business credit. A taxpayer that owns an operating mineral interest (as defined in ) in a property may claim the credit for qualified enhanced oil recovery costs (as described in ) paid or incurred by the taxpayer in connection with a qualified enhanced oil recovery project (as described in ) undertaken with respect to the property. A taxpayer that does not own an operating mineral interest in a property may not claim the credit. To the extent a credit included in the current year business credit under section is unused under section , the credit is carried back or forward under the section business credit carryback and carryforward rules.
(2) Examples The following examples illustrate the principles of this .
Example 1. Credit for operating mineral interest owner. In 1992, A, the owner of an operating mineral interest in a property, begins a qualified enhanced oil recovery project using cyclic steam. B, who owns no interest in the property, purchases and places in service a steam generator. B sells A steam, which A uses as a tertiary injectant described in section . Because A owns an operating mineral interest in the property with respect to which the project is undertaken, A may claim a credit for the cost of the steam. Although B owns the steam generator used to produce steam for the project, B may not claim a credit for B's costs because B does not own an operating mineral interest in the property.
Example 2. Credit for operating mineral interest owner. C and D are partners in CD, a partnership that owns an operating mineral interest in a property. In 1992, CD begins a qualified enhanced oil recovery project using cyclic steam. D purchases a steam generator and sells steam to CD. Because CD owns an operating mineral interest in the property with respect to which the project is undertaken, CD may claim a credit for the cost of the steam. Although D owns the steam generator used to produce steam for the project, D may not claim a credit for the costs of the steam generator because D paid these costs in a capacity other than that of an operating mineral interest owner.
(b) Amount of the credit A taxpayer's credit is an amount equal to 15 percent of the taxpayer's qualified enhanced oil recovery costs for the taxable year, reduced by the phase-out amount, if any, determined under of this section.
(c) Phase-out of the credit as crude oil prices increase
(1) In general The amount of the credit (determined without regard to this ) for any taxable year is reduced by an amount which bears the same ratio to the amount of the credit (determined without regard to this ) as—
(i) The amount by which the reference price determined under section for the calendar year immediately preceding the calendar year in which the taxable year begins exceeds $28 (as adjusted under of this section); bears to
(ii) $6.
(2) Inflation adjustment
(i) In general For any taxable year beginning in a calendar year after 1991, an amount equal to $28 multiplied by the inflation adjustment factor is substituted for the $28 amount under of this section.
(ii) Inflation adjustment factor For purposes of this , the inflation adjustment factor for any calendar year is a fraction, the numerator of which is the GNP implicit price deflator for the preceding calendar year and the denominator of which is the GNP implicit price deflator for 1990. The “GNP implicit price deflator” is the first revision of the implicit price deflator for the gross national product as computed and published by the Secretary of Commerce. As early as practicable, the inflation adjustment factor for each calendar year will be published by the Internal Revenue Service in the Internal Revenue Bulletin.
(3) Examples The following examples illustrate the principles of this .
Example 1. Reference price exceeds $28. In 1992, E, the owner of an operating mineral interest in a property, incurs $100 of qualified enhanced oil recovery costs. The reference price for 1991 determined under section is $30 and the inflation adjustment factor for 1992 is 1. E's credit for 1992 determined without regard to the phase-out for crude oil price increases is $15 ($100 × 15%). In determining E's credit, the credit is reduced by $5 ($15 × ($30 − ($28 × 1))/6). Accordingly, E's credit for 1992 is $10 ($15 − $5).
Example 2. Inflation adjustment. In 1993, F, the owner of an operating mineral interest in a property, incurs $100 of qualified enhanced oil recovery costs. The 1992 reference price is $34, and the 1993 inflation adjustment factor is 1.10. F's credit for 1993 determined without regard to the phase-out for crude oil price increases is $15 ($100 × 15%). In determining F's credit, $30.80 (1.10 × $28) is substituted for $28, and the credit is reduced by $8 ($15 × ($34 − $30.80)/6). Accordingly, F's credit for 1993 is $7 ($15 − $8).
(d) Reduction of associated deductions
(1) In general Any deduction allowable under chapter 1 for an expenditure taken into account in computing the amount of the credit determined under of this section is reduced by the amount of the credit attributable to the expenditure.
(2) Certain deductions by an integrated oil company For purposes of determining the intangible drilling and development costs that an integrated oil company must capitalize under section , the amount allowable as a deduction under section is the deduction allowable after of this section is applied. See (extent to which integrated oil company intangible drilling and development costs are qualified enhanced oil recovery costs).
(e) Basis adjustment For purposes of subtitle A, the increase in the basis of property which would (but for this ) result from an expenditure with respect to the property is reduced by the amount of the credit determined under of this section attributable to the expenditure.
(f) Passthrough entity basis adjustment
(1) Partners' interests in a partnership To the extent a partnership expenditure is not deductible under of this section or does not increase the basis of property under of this section, the expenditure is treated as an expenditure described in section (concerning decreases to basis of partnership interests). Thus, the adjusted bases of the partners' interests in the partnership are decreased (but not below zero).
(2) Shareholders' stock in an S corporation To the extent an S corporation expenditure is not deductible under of this section or does not increase the basis of property under of this section, the expenditure is treated as an expenditure described in section (concerning decreases to basis of S corporation stock). Thus, the bases of the shareholders' S corporation stock are decreased (but not below zero).
(g) Examples The following examples illustrate the principles of through of this section.
Example 1. Deductions reduced for credit amount. In 1992, G, the owner of an operating mineral interest in a property, incurs $100 of intangible drilling and development costs in connection with a qualified enhanced oil recovery project undertaken with respect to the property. G elects under section to deduct these intangible drilling and development costs. The amount of the credit determined under of this section attributable to the $100 of intangible drilling and development costs is $15 ($100 × 15%). Therefore, G's otherwise allowable deduction of $100 for the intangible drilling and development costs is reduced by $15. Accordingly, in 1992, G may deduct under section only $85 ($100 − $15) for these costs.
Example 2. Integrated oil company deduction reduced. The facts are the same as in Example 1, except that G is an integrated oil company. As in Example 1, the amount of the credit determined under of this section attributable to the $100 of intangible drilling and development costs is $15, and G's allowable deduction under section is $85. Because G is an integrated oil company, G must capitalize 25.50 ($85 × 30%) under section . Therefore, in 1992, G may deduct under section only $59.50 ($85 − $25.50) for these intangible drilling and development costs.
Example 3. Basis of property reduced. In 1992, H, the owner of an operating mineral interest in a property, pays $100 to purchase tangible property that is an integral part of a qualified enhanced oil recovery project undertaken with respect to the property. The amount of the credit determined under of this section attributable to the $100 is $15 ($100 × 15%). Therefore, for purposes of subtitle A, H's basis in the tangible property is $85 ($100 − $15).
Example 4. Basis of interest in passthrough entity reduced. In 1992, I is a $50% partner in IJ, a partnership that owns an operating mineral interest in a property. IJ pays $200 to purchase tangible property that is an integral part of a qualified enhanced oil recovery project undertaken with respect to the property. The amount of the credit determined under of this section attributable to the $200 is $30 ($200 × 15%). Therefore, for purposes of subtitle A, IJ's basis in the tangible property is $170 ($200 − $30). Under of this section, the amount of the purchase price that does not increase the basis of the property ($30) is treated as an expenditure described in section . Therefore, I's basis in the partnership interest is reduced by $15 (I's allocable share of the section expenditure ($30 × 50%)).
[T.D. 8448, 57 FR 54923, Nov. 23, 1992; 58 FR 7987, Feb. 11, 1993]