May 29, 2025
ICYMI: With the Senate picking up reconciliation legislation in earnest next week, the Tax Foundation today argued why fixing the 2022 Inflation Reduction Act’s targeted tax penalty on intangible drilling costs (IDCs) is a “natural place to start” to drive American energy dominance.
This Biden-era policy disproportionately limits the ability of America’s independent oil and gas producers to drill new wells, hire workers, and produce more energy right here at home.
In “Making the Corporate Alternative Minimum Tax Less Silly,” the Tax Foundation explains how restoring the immediate expensing of IDCs would enable equitable tax treatment for independent producers without changing the fiscal profile of the reconciliation package:
Intangible drilling costs are the operating costs associated with oil and gas extraction operations. They include costs such as worker wages, supplies, and maintenance. They are called “intangible” to distinguish them from equipment purchases, and, for most businesses, they would be considered operating costs, immediately deducted even under a tax based on book income. But in the tax code, IDCs are considered investments, as they are associated with future, rather than present, profits.
… By preventing full deductions for IDCs, the CAMT creates a tax penalty for investment in American oil and gas drilling. While this penalty is insignificant for aggregate investment, it is significant for oil and gas investment, particularly given that IDCs make up between 60 and 80 percent of an oil well’s costs. As Congress and the Trump administration discuss ways to drive American “energy dominance,” fixing a tax penalty in the tax code is a natural place to start.
A fix to IDC treatment in the tax code would not change the fiscal profile of the reconciliation package. According to a Joint Committee on Taxation (JCT) analysis of the Promoting Domestic Energy Production Act, a bill that would add full expensing for intangible drilling costs to the calculation for CAMT, the fix would only cost $1.1 billion over a decade—a rounding error in the context of a $4 trillion bill.
To learn more about why it’s critical for the Senate to act now on IDCs, read the American Exploration & Production Council’s blog on how smart tax policy for IDCs bolsters American energy dominance, strengthens America’s economy, and drives American labor and workforce.
