Maximizing Tax Incentives for Offshore Exploration and Production Efforts Following the Tax Cuts and Jobs Act of 2017

Abstract

The tax changes introduced under the newly-enacted Tax Cuts and Jobs Act (the "Act") are complex, but various provisions can be leveraged to produce direct financial benefits for innovative companies in the energy industry. Cutting edge technologies and innovations related to offshore renewable energy, robotics, automation, oilfield digitalization, geotechnical engineering, and other technical areas are critical to the growth of the energy industry. Understanding how the new provisions interrelate is essential to maximizing the Act's valuable tax incentives for offshore exploration and production companies in the United States. The Act maintains the permanency of the Research and Development Tax Credit in § 41 of the Internal Revenue Code ("IRC"), reduces the corporate tax rate from 35% to 21%, eliminates the alternative minimum tax for certain entities, limits the net operating loss deduction to 80% of taxable income, and repeals the existing carryback and carryforward provisions under IRC § 172. This paper will discuss the legal implications of the new Act and provide methods and tax strategies that will directly impact energy companies’ return on investment and strengthen offshore exploration and production efforts. Perhaps most notably, since the Research and Development Tax Credit ("RTC") remains permanent, companies in the industry may recover qualified research expenditures related to the development of new or improved products, processes, formulas, inventions, techniques, and software. The RTC is a highly valuable incentive that directly impacts a company's tax liability both at the federal level and in certain states. Because of the reduced corporate tax rate, the changes related to net operating losses, and the elimination of the alternative minimum tax for certain entities, this credit provides a powerful incentive for many energy companies. In addition, since the Act will soon require taxpayers to capitalize and amortize expenditures related to qualified research conducted outside of the United States over a period of 15 years, companies performing critical research in the United States may soon be able to realize an additional current year deduction if certain expenditures are characterized differently under IRC § 162. Creating a tax strategy that incorporates the RTC and related provisions in the Act may result in a valuable benefit to energy clients creating and utilizing intellectual property throughout the world.