How the new tax law may benefit the oil and gas industry

The sweeping tax and spending legislation enacted on July 4, 2025, commonly referred to as the One Big Beautiful Bill Act (OBBBA), includes several provisions that may be beneficial to the oil and gas industry, including but not limited to:

• Extension of 100% bonus depreciation
• Favorable interest expense provisions
• Restores the ability to deduct domestic research and experimental expenditures.

Notably, the OBBBA didn’t result in any changes to the favorable expensing provisions for intangible drilling costs and percentage depletion.

Explore the law’s new provisions and how they support the oil and gas industry with the following insights.

Bonus depreciation

Prior to the OBBBA, the first-year bonus depreciation allowance under Section 168(k) was scheduled to phase down to 40% in 2025, 20% in 2026, and sunset entirely to 0% in 2027.

The OBBBA increases the first-year bonus depreciation allowance under Section 168(k) to 100% for property acquired after Jan. 19, 2025, and makes the depreciation allowance permanent. This allows taxpayers to frontload depreciation deductions for qualifying property in the first year of ownership, lowering initial tax liability.

Interest expense

The current calculation of adjusted taxable income under Section 163(j) uses earnings before interest and taxes (EBIT). Effective for tax years beginning after Dec. 31, 2024, the OBBBA permanently shifts this calculation to earnings before interest, taxes, depreciation, depletion, and amortization (EBITDA), which effectively allows for larger deductions for business interest expense.

This restored EBIDTA treatment aligns with the permanent reinstatement of 100% bonus depreciation previously mentioned.

The OBBBA also establishes a new ordering rule that requires the Section 163(j) limitation be determined before the application of any other interest capitalization provisions, with exceptions.

Research and experimental (R&E) expenses

Under new Section 174A, the OBBBA permanently eliminates the capitalization requirement for domestic R&E expenditures under Section 174 for tax years beginning after Dec. 31, 2024.

This means that companies can, once again, fully deduct the costs associated with their domestic R&E activities in the year they are incurred. This permanent restoration offers stability for long-term research and development planning.

Note that R&E expenses incurred in a foreign jurisdiction must continue to be capitalized and amortized over a 15-year period under Section 174.

Alternatively, Section 174A allows taxpayers to elect to capitalize and amortize domestic R&E expenditures over a period of not less than 60 months or elect under Section 59(e) to capitalize and amortize R&E expenditures ratably over a 10-year period. Elections made pursuant to Section 174A apply to all subsequent taxable years and can be changed only with approval.

The new law also provides two forms of retroactive relief for previously capitalized R&E costs incurred after Dec. 31, 2021, and before Jan. 1, 2025:

• Small business taxpayers (average annual gross receipts not exceeding $31 million over the three years preceding the first tax year beginning after Dec. 31, 2024), may apply the new expensing rules retroactively to those prior years.
• All taxpayers, regardless of size, may elect to deduct those previously capitalized costs over a one- or two-year period, beginning with their first tax year starting after Dec. 31, 2024.

There are several implementation issues associated with these changes, which will require additional guidance from the Department of the Treasury, including:

• The mechanics of possible elections
• Required accounting method changes
• Potential amended returns

In the meantime, taxpayers should begin modeling the effects of expensing versus continued capitalization and amortization.

Qualified business income

The Section 199A deduction, which was enacted with the Tax Cuts and Jobs Act (TCJA) in 2017, allows certain non-corporate partners a 20% deduction for qualified business income (QBI) to level the playing field with corporations subject to a 21% tax rate. The 199A deduction, which was set to expire at the end of 2025, was made permanent by the OBBBA.

Carbon sequestration credit

The Section 45Q credit incentivizes the capture and storage or utilization of carbon oxide from direct air capture facilities or industrial sources. Prior to the OBBBA, taxpayers received a larger credit for storing carbon permanently versus using the carbon for enhanced oil recovery (EOR) or other qualifying uses.

The OBBBA provides an equal credit — $17 per metric ton base credit and $85 per metric ton where the labor requirements are met — for sequestration and qualified utilization. The credit increases to $36 per metric ton base credit and $180 per metric ton where the labor requirements are met for direct air capture facilities, regardless of whether the captured carbon oxides are sequestered or otherwise utilized.

Consideration should be given to whether to accelerate EOR projects to capture these benefits.

Corporate AMT

The OBBBA modifies the calculation of adjusted financial statement income (AFSI) for taxpayers that are subject to corporate alternative minimum tax (CAMT).

CAMT is a 15% minimum tax on the AFSI of large corporations with an average AFSI exceeding $1 billion. For taxable years beginning after Dec. 31, 2025, the OBBBA provides that AFSI is computed by disregarding the depletion expense that’s taken on the taxpayer’s applicable financial statements with respect to intangible drilling and development costs (IDCs) and deducting these IDC costs under Section 263(c) to the extent deducted from taxable income.

Previously, while the AFSI allowed for tax depreciation, net of operating losses, and other adjustments to reduce AFSI upon which CAMT was computed, the deduction of IDCs was noticeably absent.

Other provisions

There are a number of other provisions that are generally favorable to the oil and gas industry including:

• Mandate for expanded leasing on federal lands and waters.
• Delay of the Methane Waste Emission Charge for oil and gas operators until 2035 — for emissions occurring in 2034 — allowing operators more time to prepare for its application.
• Reduction in federal royalty rates (12.5% - 16.7%) versus previous levels (16.7% - 18.7%) that were instated under the Inflation Reduction Act.
• Master Limited Partnership (MLP) expansion of qualifying sources of income for tax years after 2025 to include income from hydrogen, carbon capture, geothermal energy, hydropower, among others.