The energy and natural resources sector faces an ever-changing landscape of financial pressures, including volatile commodity pricing, regulatory uncertainty, and investment in clean energy and environmental, social and governance (ESG) innovation. In the current environment, businesses should utilize every strategy available to maintain cash flow and increase profits. One such strategy is the Research and Development (R&D) Tax Credit.
The R&D Tax Credit was first enacted in 1981 to incentivize innovation and the retention of top talent in the U.S. Although it was initially intended to be a temporary measure, it was re-enacted for decades with bipartisan support until it was finally made permanent in 2015 with the passing of the Protecting Americans from Tax Hikes Act. However, corporations within the energy sector were historically limited from fully utilizing this benefit, since the R&D Tax Credit cannot reduce a corporation’s tax liability below the alternative minimum tax (AMT). That all changed in 2017 with the passing of the Tax Cuts and Jobs Act which raised the AMT exemption. As a result, many mining, oil and gas, and other energy companies were no longer required to pay the AMT, thereby opening the door for such businesses to utilize the R&D Tax Credit to offset their regular income tax liability.
Given the dynamic nature of the energy industry, innovation is all but a requirement for businesses to compete and be successful. In fact, many standard industry initiatives may qualify for the R&D Tax Credit:
-
Extraction and Production Techniques: Development of innovative methods for extracting resources more efficiently, such as advanced drilling techniques, hydraulic fracturing technologies, or improved mining processes.
-
Refining and Processing: Research and development efforts focused on enhancing refining processes to increase yield, purity, or energy efficiency, such as catalytic cracking, distillation optimization, or biofuel production techniques.
-
Alternative Energy Sources: Innovation in renewable energy technologies, including solar, wind, hydroelectric, geothermal, and biomass, to improve performance and enhance environmental sustainability.
-
Energy Storage Solutions: Development of advanced energy storage technologies such as batteries, fuel cells, or pumped hydro storage systems to address intermittency issues and enable greater integration of renewable energy sources into the grid.
-
Environmental Compliance and Sustainability: Research activities aimed at reducing environmental impact and ensuring compliance with regulations, including emissions reduction technologies, waste management solutions, and water conservation measures.
-
Carbon Capture and Sequestration (CCS): Innovation in CCS technologies to capture and store carbon dioxide emissions from industrial processes or power generation, mitigating greenhouse gas emissions and addressing climate change concerns.
-
Smart Grid and Energy Management Systems: Development of intelligent grid systems, energy-efficient appliances, and demand-response technologies to optimize energy distribution, consumption, and conservation.
-
Advanced Materials and Components: Research into novel materials and components for energy-related applications, such as high-performance alloys for turbines, lightweight materials for vehicle efficiency, or corrosion-resistant coatings for pipelines.
-
Biotechnology and Bioenergy: Biotechnological research for the production of biofuels, bio-based chemicals, and biodegradable materials from renewable biomass sources, including algae, agricultural residues, and municipal waste.
These examples illustrate the diverse range of activities within the energy and natural resources industry that may qualify for the R&D Tax Credit. Expenses related to employee time, supplies, or third-party contractors necessary to conduct research and development may be eligible R&D expenditures. If your company is conducting activities similar to the examples listed, contact a member of the Schneider Downs Credits and Incentives Team to discuss how the R&D Tax Credit can potentially reduce your company’s tax liability.
About Schneider Downs Energy & Resources ServicesÂ
The Schneider Downs Energy & Resources 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. Â
To learn more, visit our Energy and Resources Industry Group page.Â
