West Texas Intermediate’s $40 December dip has caused many in the oil patch to dust off their downturn playbooks even though the scabs from the last time have hardly healed. Most of the painfully learned lessons from the past remain the same, but the federal income tax changes enacted at the end of 2017 create some new issues and opportunities.
The bad news is that several of the tax changes can adversely affect the tax bill of oil patch companies. Specifically, net operating losses can no longer be carried back to prior years, allowing the clawback of income taxes paid since the last crash. Such losses can now be carried forward indefinitely but can only offset 80% of each future year’s taxable income.
Adding insult to injury, interest expense deductions are typically limited to 30% of adjusted EBITDA with excess interest expense carried forward indefinitely. Also, the alternative minimum tax continues to apply to individuals and is more insidious given the reduced regular income tax rates particularly when “new to you” equipment is expensed in the year of acquisition.