Just months after declaring the total phase-out of the 2022 Marginal Well Credit, the IRS has released Notice 2023-58, announcing that the Marginal Well Credit will be zero for the 2023 tax year as well.
For background, the Marginal Well Credit was enacted in 2004 and is a production-based tax credit granted to taxpayers that hold an operating interest in qualified marginal wells. To qualify, wells must be domestic, and their production cannot exceed 25 barrel-of-oil equivalents per day. The credit amount is adjusted each year based on the applicable reference price of natural gas and an inflation factor. Generally, the credit is phased-out if the reference price for the tax year exceeds $2.00 per MCF, adjusted for inflation. These figures typically represent the prices and inflation from the prior tax year. For tax year 2023, the reference price is $5.57; and the inflation factor is 1.4993.
Due to the higher natural gas prices during the prior tax year, the credit reduction amount exceeds the tentative credit amount, causing the 2023 credit to be completely limited for the year. More information on the calculation of the credit and limitations can be found in our prior Our Thoughts On articles.
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