Oil and Gas Equipment Fabrication Qualifies for Valuable Tax Credits

Oil and Gas Equipment Fabrication Qualifies for Valuable Tax Credits

Posted by Jeffrey Feingold on 12.21.17

The oil and gas industry is ramping up production as new oil and gas plays are uncovered. To keep up with growing operations and new well sites, new drilling and production equipment demands must be met by oil and gas equipment fabricators. Oil and gas equipment fabricators have thus recently invested tremendous time and expenses to research and develop modular fabrication techniques that simplify delivery and installation while meeting high safety and quality standards. Equipment fabricators in oil and gas also develop new and improved equipment for pipelines, flowback, and well testing.

Oil and gas equipment fabricators often employ a work force including engineers, forepersons, instrument technicians, electrical technicians, welders, pipe fitters, and quality assurance personnel that contribute directly to new or improved equipment and/or provide important feedback into the development of new or improved equipment. Oil and gas equipment fabricators conducting research and development activities, may qualify for and benefit from R&D tax credits. Potentially eligible costs for R&D tax credits include wages, cost of supplies, cost of testing, and contract research expenses. The activities and associated expenditures of an oil and gas equipment fabricator can qualify for the R&D tax credit if the activities meet the following four-part test established by the IRS:

  1. Qualified Purpose - The purpose of the research must be to create a new or improved product, process, or formulation, resulting in increased performance, function, reliability or quality.
  2. Technological in Nature – The research must rely on the hard sciences, such as engineering, physics, chemistry, biology or computer science.
  3. Elimination of Uncertainty – Activities must overcome some unknowns, such as uncertainty as to capability, optimal design, or optimal methodology. 
  4. Process of Experimentation – Experimentation can be demonstrated through prototypes, simulations, systematic trial and error, or other methods of evaluating alternatives to achieve a desired result.

Here are some of the qualifying research activities that oil and gas equipment fabricators undertake that may translate into R&D tax credits:

  • Designing new or improved oil and gas production plants
  • Developing new technologies to achieve compliance with changing emissions regulations
  • Developing new skid mounted processes or mechanical equipment packages for difficult topography
  • Developing an improved flare gas recovery system
  • Creating a design-basis memorandum and project execution plan to support engineering efforts
  • Designing and engineering for new or improved equipment
    • Including, but not limited to:
      • Separation Equipment
        • Knock-out Drums
        • Demisters
        • Multi-cyclone Separators
        • Gas Filter Separators
      • Heat Exchangers
        • Shell and Tube
        • Hairpin
        • Air-cooled
        • Plate and Frame
      • Fired Heaters
        • Water, steam, hot oil, salt baths
        • Sweetening Equipment
        • Solid to Gas
        • Liquid to Liquid
        • Liquid to Gas
      • Production Unit Systems
        • Electrostatic Desalters
        • Heater-Treaters
        • Pig Launchers & Receivers
        • Multi-well Head Manifolds
      • Filtration Systems
      • Liquid Recovery Systems

The proper identification, quantification, and documentation for qualifying research activities and associated expenditures towards the R&D tax credit requires a thorough review of a company’s personnel and projects undertaken. Companies engaging in oil and gas equipment fabrication often expend time and resources on qualified research that enable taking advantage of the R&D tax credit. A qualified R&D credit professional can conduct a thorough R&D tax credit study to assess which activities meet the IRS’ four-part test to qualify for the credits.

The R&D tax credit can help oil and gas equipment fabricators recapture some of the expenses relating to their research and development.

Request a free assessment to determine qualifying R&D tax credit eligibility.

Tax Point Advisors, a firm with expertise in working with small and midsize companies, works with businesses that may qualify for R&D tax benefits. For more information, call us at 800-260-4138 or please leave us a message below.

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