The recently passed One Big Beautiful Bill (OBBB) introduced sweeping income tax changes that will significantly affect businesses in the energy and natural resources sector, especially those involved in natural gas and coal production, development, and transportation.
Below are seven of the OBBB’s most important income tax implications for the energy and natural resources sector:
Depreciation Changes
The OBBB permanently extends 100% bonus depreciation (previously scheduled to drop to 40% in 2025) for qualifying property placed in service after January 19, 2025. This applies to assets commonly used in the natural gas and coal sectors, such as drilling equipment, vehicles, pipelines, tangible drilling costs, and other property with a recovery period of 20 years or less.
In addition, the Section 179 expensing limit increases to $2.5 million, and the investment limitation increases to $4 million starting in 2025, with future inflation adjustments. These changes provide significant opportunities to accelerate deductions on equipment and infrastructure investments.
Section 163(j) Interest Deduction Changes
The OBBB permanently reverts the §163(j) limitation from EBIT back to EBITDA for tax years beginning after December 31, 2024. Adjusted taxable income can be computed without a reduction for depreciation, amortization, or depletion, thereby allowing a larger amount of interest that can be deducted. This change increases allowable interest deductions and particularly benefits capital-intensive development companies.
Qualified Business Income Deduction
The OBBB makes permanent the 20% deduction of ordinary business income from qualified pass-through entities. For privately held natural gas producers, coal operators, and related service providers structured as partnerships, LLCs, or S corporations, this deduction effectively lowers the top individual effective tax rate from 37% to 29.6%. This deduction, previously set to expire at the end of 2025, is now permanent and provides welcome certainty for owners and investors.
Expensing of Qualified Research and Experimental Expenses (QREs)
Beginning in 2022, domestic QREs had to be capitalized and amortized over six years, reducing the immediate tax benefit of investing in new exploration technologies, environmental compliance strategies, and process improvements.
Under the OBBB, for tax years beginning after December 31, 2024, domestic R&D costs will once again be fully deductible in the year incurred. Companies can also deduct the remaining unamortized QREs capitalized from 2022–2024 in 2025 or elect to split the deduction across 2025 and 2026. Small taxpayers (with average gross receipts of $31 million or less over the prior three years) may amend 2022–2024 tax returns to claim these deductions retroactively.
Section 45X Advanced Manufacturing Credit Expanded to Metallurgical Coal
The OBBB expands the Section 45X Advanced Manufacturing production tax credit to include metallurgical coal mined in the United States, recognizing it as a critical mineral. This credit, equal to 2.5% of eligible production costs, is available for tax years 2026 through 2029. Importantly, the credit applies whether the metallurgical coal is sold domestically or internationally, as long as it is mined within the U.S., offering significant tax benefits to producers serving both domestic steelmakers and global markets.
Modification of Clean Energy Tax Credits
The OBBB significantly reshapes many of the clean energy tax credits originally enacted under the Inflation Reduction Act of 2022. While some credits were immediately repealed with the bill’s passage, others saw their phaseouts accelerated to earlier tax years. The changes impact a wide range of incentives — from consumer-focused credits, such as those for energy-efficient home improvements and electric vehicles, to producer- and developer-level credits that support the generation and development of renewable energy projects.
SALT Work-Arounds Retained
The OBBB retains the popular workaround allowing pass-through entities to fully deduct state and local income taxes paid on behalf of their owners. This remains especially valuable to operators and service businesses in high-tax states. For individual taxpayers, the SALT deduction cap increases to $40,000 (from $10,000) but phases out for married taxpayers with AGI over $500,000, making the entity-level workaround a critical planning tool.
If you have questions about how the OBBB may affect you or your business, please reach out to us at [email protected].
This article is part of our ongoing series on the potential impact of the One Big Beautiful Bill. You may view our full library on our OBBB Resource Center.
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