This issue came up off-line, so I figured I should post about it. Some people in the oil industry claim that the deduction for intangible drilling costs is not a subsidy but an allowance for real expenses. And they are correct! Which is why nobody proposes to eliminate it.
When oil and gas companies drill, they incur all sorts of expenses beyond the cost of the materials used in the well. They need to prepare the site, build roads and gathering fields, install tanks, etcetera and ad naseum. In addition, they often pay service companies for, you know, services. These costs are real costs (there is nothing intangible about them) and the companies should be able to deduct them. Otherwise the tax code would be treating expenses as income, and that would be crazy.
The rub is that all companies incur similar costs. When Nissan builds a factory, it pays for all sorts of things beyond the cost of materials for the buildings and machinery. These costs are deductible. But when costs are used to build an asset that will produce for a long period of time, then the standard rules are that the company has to deduct those costs over a long period of time. For example, if you build a $5 million factory in one year, you cannot deduct the expenses the year you make them. You need to spread them out, (say) one million per year for five years.
Oil and gas companies, for some reason, are allowed to deduct those expenses up front, in the year that they are made.
The debate is over whether that special treatment should be allowed. (An overivew of oil and gas tax issues in the 2012 budget can be found here.) There are reasonable arguments on both sides of this debate, but do not allow oil company representatives to mislead you into thinking that anybody is considering the nutty idea of removing the deduction for intangible drilling costs.
That is all.
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