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Dealing with the tax credit changes Alaska’s Tax Division works through the ramifications of ending cashable tax credits and using operating loss carry forwards Alan Bailey Petroleum News
The Alaska Department of Revenue’s Tax Division is working through the ramifications of House Bill 111, the bill passed by the state Legislature earlier this year to end cashable state oil and gas production tax credits, Ken Alper, the division’s director, has told Petroleum News.
Complications arise because the cashable tax credits ended at the end of June, so that only expenditures incurred prior to July 1 qualify for credit use. Dealing with this is simple in the case of credits relating to discernible items of expenditure, such as capital credits in Cook Inlet. In that case, the invoice date for the expenditure determines whether the expenditure was incurred prior to the July 1 cutoff date, and hence qualifies for a credit, Alper explained.
Operating loss credits Operating loss credits present a more complex problem because, whereas the state’s fiscal year ends on June 30, the state oil and gas production tax is a calendar year tax, with a tax filing deadline of March 31 of the following year. A company obtaining some revenue from oil and gas production may be operating at an overall loss during 2017. But it is not feasible to identify from the company’s tax filing what portion of that loss applied to just the first half of the year.
It may have been possible to deal with this issue by splitting 2017 into two separate tax periods, with one ending on June 30 and both requiring the filing of tax returns. However, this would have created a huge regulatory burden for the state, Alper said.
Instead, the legislators included in HB 111 a provision enabling the use of a company’s operating losses for the whole of 2017. The law allows 50 percent of this loss to be attributed to the first half of 2017, thus qualifying it for a cashable credit - the other 50 percent does not qualify. This arrangement, while a rational solution to the credit allocation problem, works to the advantage of a company with a large specific expenditure in the second half of the year, but to the disadvantage of a company with a large expenditure in the first half, Alper explained.
Tax credit certificates can be earned for the second half of the year, but these certificates cannot be exchanged for cash from the state - they can be held as credits against future production taxes, or they can be sold to another company, which can then use them as credits against their taxes.
Operating loss carry forward Starting in 2018 the state is moving to a new arrangement, under which operating losses rather than tax credits are carried forward. Those losses can be deducted against future production tax liabilities, using the tax rules, such as the tax rates, that apply at the time.
A complication is that the operating losses will be attached to the leased land rather than the company that incurs the losses, Alper explained. Moreover, under the new tax law the operating losses will be ring fenced: They can only be offset against taxes relating to the property for which they were incurred and not against taxes relating to any of a company’s other North Slope operations.
This raises questions of how specifically to apply the ring fencing rules. There is also an issue regarding how to deal with a lease transfer when there are expenditures tied to the lease, Alper said.
The Tax Division has held a meeting with the oil companies to glean the industry’s comments and suggestions for how to implement the new tax law. This fall the division will work on drafting new regulations to accommodate the statutory changes. The regulation revision process will incorporate a public comment period, Alper said.
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