Accounting

3 oil and gas investments that bring big tax savings

Published

1 day ago

January 6, 2025

Oil and gas investments tapping into tax advantages for drilling costs, qualified opportunity zones and 1031 exchanges could bring valuable returns with fewer payments to Uncle Sam.

Financial advisors working with high net worth investors or other clients seeking diversification with tax savings should consider alternative investments in oil and gas, according to Matthew Iak, executive vice president of the U.S. Energy Development Corporation, which invests in, operates and drills wells. While renewable energy gets its own tax advantages, some tailwinds are gusting behind oil and gas assets based on the higher likelihood that incoming President Donald Trump and the Republican-led Congress will extend policies such as the opportunity zones and expand the record production and growth started under President Joe Biden.

For high net worth and other accredited investors, the oil and gas assets represent “a really great financial planning tool” and a change in recent years in an energy industry in which “the tax tail used to wag the investment dog,” Iak said in an interview.

“Energy has designed itself very well to take advantage of these tax arbitrages,” Iak said. “It used to be a very tax-driven industry that wasn’t always as economically driven, and I think that paradigm has shifted as a whole in the last five to seven years.”

The asset class remains a volatile one subject to an array of macroeconomic and geopolitical factors that are delivering “more uncertainty in energy markets heading into a new year than any year since the pandemic,” according to an outlook report for 2025 by S&P Global Commodity Insights. Wars in Ukraine and the Middle East, U.S.-China tensions, electricity demand for artificial intelligence and possible tariffs or pullouts from international climate agreements add up to just a few of them. Political pushback against ESG and bad actors’ frequent use of schemes tied to energy investing bring further potential risks or rewards.

“There are emerging technological and fundamental trends that will clearly have an impact on markets over the coming year, although how significant their impact will be is uncertain,” S&P Global Commodity Co-President Dave Ernsberger said in a statement.

Still, the prospects for energy investments in general for 2025 look “bright,” according to a December note by Fidelity Investments portfolio managers Maurice FitzMaurice and Kristen Dougherty. Other elements of the equation are weighing more heavily than the outcome of the election, which “should not have a significant impact on oil markets,” they wrote.

“The price of crude oil is likely to remain elevated in 2025 due to rising global demand, constrained global supply and elevated geopolitical risk,” their outlook report’s key takeaways read. “More energy producers are likely to boost crude-oil production in an environment of higher prices. Elevated crude-oil prices make it easier for many energy companies to generate higher profits, especially energy producers and energy equipment and services companies.”

Against that larger backdrop, Iak focused on three possible forms of private investments that are different from a publicly traded energy company’s stock or a sector-focused ETF.

Drilling deductions

The first revolves around Section 263(c) of the Tax Code, which enables the deduction of intangible drilling costs for new oil and gas wells and future depreciation expenses on the equipment at the facilities. Investing in a new oil well could help advisors and their clients reduce their annual income for tax-bracket purposes while opening opportunities for strategies such as a Roth conversion or savings on a required minimum distribution from an individual retirement account and qualifying for greater deductions on the profits of pass-through entities.

“You’re able to write the dollar off, and most of it in the calendar year that you invest,” Iak said. “In financial planning, if you like the underlying investment, most importantly, and you can pair that with tax planning, it becomes a really amazing tool. You can net a lot of money when you do this right. … It becomes a key to accomplish something in financial planning.”

Opportunity zones

Oil and gas or renewable energy investments in economically distressed areas designated as “qualified opportunity zones” under the Tax Cuts and Jobs Act come with further tax advantages. Deferral of taxes on capital gains and duty-free growth after a decade tack on additional savings on top of the underlying returns. That’s why Iak refers to opportunity zones as “a mega-Roth for capital gains” and, although he admits he is “very biased” in saying so, why he believes they are “the single greatest tax code ever written,” he said.

With lawmakers expected to enshrine opportunity zones past their current expiration in 2027 as part of this year’s tax debate, rural areas such as some parts of the famed Permian Basin in Texas could garner an influx of investments, Iak added.

“Most of the benefits will be after 10 years, but that’s the design. You want that money to keep growing and growing and growing,” he said. “I think they’re going to grow immensely when they re-up this, especially with some of the potential rules that they’re putting in there.”

1031 exchanges

The tax efficiency of other investments that traditionally seem devoted to different parts of a portfolio apply to some energy plays, too.

While 1031 exchanges usually relate to real estate investments in which an owner who sells one property and uses the proceeds to buy a similar “like-kind” asset can defer the taxes on their capital gains, they work for certain energy holdings as well. Some energy investments meet the strict requirements for so-called real property that would be eligible for a 1031 exchange — even if the original asset is an apartment building. Of course, careful legal counsel about the right structure for the transaction will ensure the highest possible savings.

“It tends to work extremely well for mineral rights,” Iak said. “It works just like any other 1031 exchange, and most people aren’t even aware of it.”

Accounting

In the blogs: Great minds

Published

2 hours ago

January 7, 2025

Business Finance News

Trump’s tax policy guy; states copy the feds; what’s in a name; and other highlights from our favorite tax bloggers.

And we’re off

Current Federal Tax Developments (https://www.currentfederaltaxdevelopments.com/): Out with the good news and in the bad: Matthew Hutcheson, convicted of wire fraud in 2013 and sentenced to 17 years, had his remaining sentence commuted by President Biden as part of his end-of-term pardons. Three days into this year, though, the Tax Court tagged Hutcheson for taxes on what he’d embezzled that led to those convictions.
TaxProf Blog (http://taxprof.typepad.com/taxprof_blog/): A look at Ken Kies, named by Trump to be Treasury assistant secretary for tax policy.
Don’t Mess with Taxes (http://dontmesswithtaxes.typepad.com/): Time’s running out for 2025’s first batch of taxpayers who got filing extensions due to disasters in 2024.
Mauled Again (http://mauledagain.blogspot.com/): A new year, an old problem and a fresh, different stage: A look at a recent IRS warning about tax lies on social media.
TaxConnex (https://www.taxconnex.com/blog-): Every new year brings a ton of developments in all varieties of tax (with the next couple of years being People’s Exhibit A). Sales tax, driven by burgeoning ecommerce, again has more than its share of trends on tap.
U of I Tax School (https://taxschool.illinois.edu/blog/): A look back at this blog’s top entries of 2024 include such topics as employees versus contractors, 1099-Ks and the ever-popular beneficial ownership information reporting.
John R. Dundon II EA (http://johnrdundon.com/blog/): Why the blogger recommends voluntary BOI filing no matter the back and forth on the subject in courts.

Great minds

Taxbuzz (https://www.taxbuzz.com/blog): “Rob Gronkowski and Elon Musk Agree: It’s Time to Simplify the U.S. Tax Code.”
Tax Vox (https://www.taxpolicycenter.org/taxvox): States can be labs for tax moves, but the reverse can also happen: The federal Child Tax Credit has inspired Minnesota to launch its own credit.
The Buzz About Taxes (http://thebuzzabouttaxes.com/): In the landmark Bruyea v. United States decision, the U.S. Court of Federal Claims has ruled in favor of a dual Canadian-U.S. citizen, allowing a treaty-based foreign tax credit to be applied against the NIIT.
Institute on Taxation and Economic Policy (https://itep.org/category/blog/): How undocumented immigrants do pay a hefty share of taxes.
Gordon Law (https://gordonlawltd.com/blog/): Could Puerto Rico become the next big crypto tax haven?

Detail-oriented

Accounting

IRS, Treasury finalize rules for clean electricity tax credits

Published

6 hours ago

January 7, 2025

Business Finance News

The Treasury Department and the Internal Revenue Service released final rules Tuesday for the Clean Electricity Investment and Production Tax Credits in Sections 45Y and 48E of the Tax Code.

The tax credits, also known as the “technology-neutral credits,” aim to reduce energy costs and meet growing demand created by major investments in the U.S. economy.

To receive the full value of the credits, taxpayers need to meet standards for paying prevailing wages and employing registered apprentices, helping ensure more clean energy jobs are good-paying jobs, and growing career opportunities for workers in the clean energy sector. The technology-neutral Clean Electricity Production and Investment Tax Credits are also eligible for bonus credits related to siting projects in energy communities and meeting certain standards for using domestic content.

According to an analysis from the Department of Energy, the tech-neutral credits, along with other Inflation Reduction Act and Bipartisan Infrastructure Law provisions, are expected to save American families up to $38 billion on electricity bills through 2030.

The final rules issued Tuesday provide more clarity and certainty about which clean electricity zero-emissions technologies qualify for the credits, including wind, solar, hydropower, marine and hydrokinetic, geothermal, nuclear, and certain waste energy recovery property. The Treasury and the IRS expect to soon release the first Annual Table confirming this list of qualifying technologies. The final rules also include guidance to clarify how combustion and gasification technologies can qualify in the future, including on how lifecycle analysis assessments compliant with the statute will be conducted.

“The final rules issued today will help ensure America’s clean energy investment boom continues – driving down utility costs for American families and small businesses, creating good-paying construction jobs, and strengthening energy security by making the U.S. more resistant to price shocks,” said Treasury Secretary Janet L. Yellen in a statement.

However, the new rules face pushback from the incoming Trump administration, with President-elect Trump saying Tuesday, “We’re going to try and have a policy where no windmills are being built.”

Accounting

Caseware to acquire lease software company

Published

7 hours ago

January 7, 2025

Business Finance News

Audit and accounting data solutions provider Caseware announced the acquisition of Atlanta-based SaaS provider LeaseJava. This is Caseware’s eighth acquisition since Hg Capital acquired majority ownership in late 2020.

Cloud-based LeaseJava is designed to help audit firms, corporations and non-profit/government entities to manage their leases and ensure compliance with accounting standards such as ASC 842, IFRS 16 and GASB 87. Specifically, it supports lease modifications without the need to create a new lease, as modifications can easily be added to existing leases. The solution is made to handle complex and nuanced scenarios, computing details down to the daily level and aggregating them to manage intricate situations. Export functionality is configurable, allowing the user to select and group leases accurately. Additionally, LeaseJava offers weighted average computation and a bulk import feature to enhance ease of use.

A spokesperson with Caseware said current customers of LeaseJava will still be able to use the software they’ve been using. Meanwhile, Caseware customers will be able to purchase it in the coming months. Caseware is in the process of evaluating continued application of the LeaseJava branding relative to future product plans.

This acquisition is an example of Caseware’s continued commitment to investing in solutions that will improve the accountant’s experience while providing integrated workflow management and analytics, according to the spokesperson.

“This acquisition underscores Caseware’s commitment to enhancing its connected ecosystem, artificial intelligence strategy and the provision of an even more comprehensive suite of trusted, innovative solutions. Customers can look forward to a seamless experience and the continued evolution of the Caseware family of products, enabling them to effortlessly manage their workflows and do their jobs better than ever before,” said David Osborne, Caseware CEO.

LeaseJava is headed by Michael Cheng, who is also a partner at Frazier and Deeter LLC. Prior to that, he worked directly with the FASB as a senior project manager. He is also a current member of the FASB’s Private Company Council, one year into his three-year term.

“I co-developed LeaseJava to solve the issues I was experiencing with lease computations along with Venkat Avasarala, Partner and CEO of Acuvity Consulting. He played a key role in its development, providing strategic leadership and expertise that were instrumental in shaping the platform’s growth and success,” said Cheng. “The acquisition by Caseware marks a significant milestone for both the solution and the profession. I am confident that the Caseware team, renowned for its innovation and commitment to excellence, will enhance the capabilities of LeaseJava, providing even greater value to users. Caseware’s global footprint and unparalleled ability to deliver expertly crafted technology and domain expertise worldwide, underscores their position as an industry leader.”

Caseware’s US customers will be the first to benefit from LeaseJava. The organization also plans to extend the solution’s availability to other markets, including Canada and the UK. LeaseJava has been available for sale in the US and supports US GAAP, IFRS and GASB lease accounting, with a revised onboarding process for new customers to purchase over the coming months.