For the first year since 2021, the Marginal Well Credit (MWC) will be available for the tax year 2024 to taxpayers to provide valuable tax-saving opportunities for natural gas producers who hold an operating interest in qualified marginal wells.
A marginal well is defined as a domestic well with marginal production of crude oil or natural gas under the percentage depletion rules: that is, a well producing 15 barrels of oil equivalent per day or 90 mcf or less per day.
While there is no limit on the number of qualified wells that may be used to determine the credit, the MWC is subject to several important requirements and limitations:
- Operating Interest Requirement: Taxpayers must hold an operating interest in a marginal well to qualify for the credit.
- Credit Amount Based on Reference Price: The credit amount is determined based on the average wellhead price of domestic natural gas from the prior year (referred to as the reference price).
- Qualified Production Limitation: The credit can only be claimed for qualified production on the first 1,095 barrels of oil equivalents (6,570 mcf) for each well during the tax year.
- Short-Year Limitation: There are limitations on production in a short tax year.
The MWC is included in the general business credit, meaning it cannot offset tax liabilities generated by the alternative minimum tax (AMT).
In accordance with IRS guidance in Notice 2024-52 (IRB 2024-27), the same methodology continues to be used to calculate the credit for the 2024 tax year, resulting in a $0.77 tax credit per qualified mcf of production. This could provide taxpayers as much as $5,058.90 in tax savings per each qualified well they own.
The marginal well credit, per mcf, for the five most recent tax years is as follows:
Tax Year Credit Allowed
2020 – 0.66
2021 – 0.67
2022 – 0.00
2023 – 0.00
2024 – 0.77
Notably, the MWC includes oil production under the definition of qualified marginal wells; however, this aspect is subject to a separate limitation that is not detailed in this article. Due to high oil prices in recent years, the credit related to oil production has been phased out for all tax years.
If you think you could benefit from the credit or would like to discuss the 2024 Marginal Well Credit, please contact a Schneider Downs tax advisor.
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