Welcome to our Energy FAQs, created to help organizations across coal and aggregates, oil and natural gas, and renewable energy navigate today’s tax, accounting and reporting challenges.
This resource answers common questions we hear in the industry, from available credits and incentives to specialized deductions, impairment considerations, reserve estimation, asset retirement obligations and grant reporting requirements.
We’d love to hear from you. If you have a question for our Energy team, send us a question at [email protected]
Coal companies may benefit from several federal tax incentives aimed at supporting domestic production and environmental compliance. One notable credit is the Section 45X Advanced Manufacturing Production Credit, which applies to U.S.-mined metallurgical coal used in steelmaking. This credit offers 2.5% of production costs as a tax benefit from 2026 through 2029, recognizing metallurgical coal as a critical mineral.
One Big Beautiful Bill Expands Section 45X Tax Credit to U.S. Metallurgical Coal Producers
Coal producers can benefit from the percentage depletion allowance, which lets them deduct a fixed percentage of gross income from mining operations regardless of actual basis. For coal, this rate is typically 10%, and while it’s subject to certain income limits, it can significantly reduce taxable income. Another key deduction is the expensing of exploration and development costs, allowing companies to immediately write off qualifying expenses rather than capitalizing and amortizing them over time. This accelerates tax benefits and improves cash flow; however, its impact on the Alternative Minimum Tax should be reviewed before claiming the deduction.
In a volatile price environment, it is key to ensure that a company is assessing whether long-lived assets, including both proved and unproved properties, are potentially impaired. An impairment analysis should be performed at least annually or when a triggering event, such as a dramatic price decline, cost overruns or overall operational challenges occur. The standard process to test impairment involves a two-step approach that first consists of comparing undiscounted cash flows to the asset’s carrying value. If there is indication that the carrying value of the asset exceeds the future undiscounted cash flows, a company would then look to the second prong of the test and recognize an impairment loss that is calculated based on the difference between the carrying value and the fair value or the discounted cash flow value. For additional details on this topic, please refer to the article below.
One key tax incentive available to oil and natural gas companies is the Credit for Marginal Well Production. This federal credit is designed to support producers operating low-output wells—typically those producing no more than 15 barrels of oil or 90 thousand cubic feet of natural gas per day.
The credit triggers when market prices fall below a set threshold, helping offset operating costs during downturns. Eligible producers must hold an operating interest in the well, and the credit can be applied against income tax liabilities or carried forward to future years. It’s a valuable tool for maintaining production from wells that might otherwise be uneconomical.
For tax year 2024, the credit is $0.77 per mcf and for 2025, the credit is $0.79 per mcf.
Pennsylvania’s impact fee offers natural gas producers a more predictable and straightforward cost structure. Instead of taxing the volume or market value of gas extracted, the fee is based on the number and age of wells, with adjustments tied to gas prices and inflation. This approach helps producers avoid the uncertainty and administrative complexity that often comes with severance taxes.
In contrast, severance taxes used in other states fluctuate with commodity prices and are calculated on the value or quantity of gas produced. That means producers in those states may face higher costs during market peaks and more volatile financial planning. Pennsylvania’s model provides a stable, well-defined framework that simplifies compliance and budgeting for operators.
Selling mineral rights typically results in a capital gain, where the sale proceeds are compared to your basis in the property to determine the taxable amount. If the property was held for more than one year, the gain is taxed at long-term capital gains rates, which are generally lower than ordinary income tax rates. This creates a one-time taxable event that is often simpler to report.
Leasing mineral rights, on the other hand, generates ordinary income through upfront bonus payments and ongoing royalties. These payments may qualify for depletion deductions, allowing you to recover part of the resource’s value over time, but they also require more complex reporting.
Reserve estimates are a key component of presenting fair and accurate financial statements. Oil and gas properties normally account for a significant portion of a company’s balance sheet and are accounted for utilizing four underlying approaches. (1) analogy – relying on comparisons to similar assets (quick but least accurate); (2) volumetrics – calculating in-place and recoverable volumes via physical and seismic properties (used for newer properties, but sensitive to the data quality); (3) performance-curve analysis that includes extrapolating historical production declines to determine economic limits (more precise once production data matures); and (4) material balance techniques, which compare reservoir pressure and production over time. Each method offers varying precision depending on the quality of the underlying data and property maturity. To learn more please refer to the following article:
Funds associated with a federal grant for orphaned wells normally require strict adherence or risk forfeiture. These requirements may include state-related quarterly reporting, and if applicable, annual Personal Property Reports if the funds are used to acquire equipment. Any issues that impact objectives, such as cost overruns or delays, should be promptly disclosed and tracked internally. This documentation should include mitigation plans and assistance requests. Grantees should leverage centralized systems such as the Ground Water Protection Council’s Risk-Based Data Management System to track well locations, plugging costs, methane emissions, and reclamation outcomes. Please refer to additional details within the full article below.
Reporting Responsibilities Under Federal Grants for Orphaned Well Plugging and Reclamation
Asset retirement obligations (AROs) are one of the defining intricacies associated with oil and gas accounting. The guidance for asset retirement obligations is included in the Financial Accounting Standards Board Codification ASC 410-20 and mandates that asset retirement obligations should be recorded when there is a legal obligation to retire a long-lived asset and the fair value of the obligation can be reasonably estimated. This fair value technique involves present valuing the obligation and establishing an associated capitalized cost. Like any other balance sheet estimation, this can be a complex calculation that requires much collaboration across company data.
Renewable energy companies can benefit from the long-standing Research and Development (R&D) Tax Credit, which supports innovation in areas like solar, wind, energy storage, and carbon capture. The Inflation Reduction Act (IRA) added major incentives, including the Investment Tax Credit (ITC), Production Tax Credit (PTC), clean hydrogen and carbon capture credits, and advanced manufacturing credits. However, the One Big Beautiful Bill Act (OBBB) recently revised these programs, accelerating phase-outs, imposing stricter domestic sourcing rules, and limiting eligibility for projects tied to foreign entities. While some credits remain—such as those for carbon capture and clean fuels—companies should act quickly, review compliance requirements, and leverage R&D credits to offset costs as timelines and conditions tighten.
Maximizing Returns: Leveraging R&D Tax Credits in the Energy and Natural Resources Sector
The One Big Beautiful Bill: Key Green Energy Tax Credits Set to Expire
The Schneider Downs Energy industry group provides specialized financial advice and services to our clients in the oil and gas, mining and aggregates, forest products and alternative fuel and energy industries throughout the Columbus and Pittsburgh regions. Our extensive knowledge of industry issues enables us to provide proactive audit, tax and management consulting services.
To learn more, visit our Energy Industry Group page.
