The One Big Beautiful Bill Act, signed into legislation in July 2025, has transformed the energy investing model in America with sweeping tax incentives that most particularly benefit oil and gas investors. The new law is ushering in a new era of energy investing by making certain essential tax incentives permanent that had been scheduled for expiration, supplemented with entirely new provisions aimed at advancing domestic energy production. To investors seeking to maximize returns while minimizing tax liabilities, awareness of these developments is now more important than ever.
Permanent 100% expensing for drilling equipment
One of the most compelling provisions for energy investors is the permanent renewal of 100% bonus depreciation on tangible drilling equipment and related assets. Starting January 20, 2026, this provision allows investors to depreciate the full cost of eligible property that has a recovery period of 20 years or less in the year that the property is placed in service, rather than depreciating it over multiple years.
This applies to a wide range of oil and gas properties like drilling rigs, vehicles, pipelines, and process facility equipment. Bonus depreciation was slated to reduce to 40% in 2025, then 20% in 2026, and disappear altogether by 2027. The permanent extension of 100% expensing dramatically improves the cash flow scenario of new energy projects by reducing after-tax costs upfront.
Intangible drilling costs remain fully deductible
One of the most powerful tax vehicles available to oil and gas investors, intangible drilling costs still offer up-front tax relief under the new law. IDCs are expenses that have no salvage value, such as labor, drilling fluids, location preparation, geologic surveys, and all costs of drilling that are not salvageable. IDCs commonly average from 60% to 85% of total well development expenses.
Investors can deduct 100% of their IDCs in the year they incurred, if the well is produced by March 31 of the following year. The front-end deduction provides excellent tax savings in the form of reduced taxable income for the year. If an investor has $500,000 in IDCs and is in the 35% bracket, for example, it would save him or her $175,000 in taxes in the initial year.
Notably, working interest owners remain excluded from passive loss rules of IRC Section 469(c)(3) and thus such deductions are applied against active income currently, including W-2 wages, business income, and capital gain. The law maintained the full deductibility of IDCs and protected them from Corporate Alternative Minimum Tax by deducting the entire IDC amount from Adjusted Financial Statement Income.
Qualified business income deduction made permanent
The OBBB renders permanent the 20% qualified business income deduction for pass-through entities under Section 199A, previously scheduled to sunset at the close of 2025. The provision allows taxpayers to deduct up to 20% of qualified business income from partnerships, S corporations, and other pass-through structures.
For private oil and gas producers, coal mines, and related service providers that are pass-through entities, this deduction lowers the highest individual effective rate from 37% to 29.6%. The permanent extension creates long-term certainty for owners and investors in making capital investment choices.
Expanded section 179 expensing limits
The OBBB increased Section 179 expensing limits significantly, raising the high limit to $2.5 million and the phaseout threshold to $4 million of property placed in service in the tax year for taxable years beginning after 2024. Both will be indexed for inflation for taxable years beginning after 2025.
Section 179 allows businesses to deduct full cost of acquisition of eligible equipment in full rather than depreciate assets over years. This is a handy flexibility in managing taxable income and is particularly valuable for property types outside the bonus depreciation.
New 100% expensing for qualified production property
OBBB introduces the entire new provision under Section 168(n) that offers 100% expensing of listed nonresidential real property involved in qualified production activities within the United States. Property should qualify as part of the production, manufacturing, or refining process, and construction must begin after January 19, 2025, and before January 1, 2029, and must be placed in service before January 1, 2031.
This provision essentially expands the use of 100% bonus depreciation to include property that would otherwise qualify for non-accelerated depreciation, such as manufacturing facilities and production plants. For oil and gas operations, it could be refining activities and processing facilities with qualified production activity.
Expanded interest deduction limits
The OBBB retroactively revives the Section 163(j) limit of EBIT to EBITDA for tax years beginning after December 31, 2024. It provides for the calculation of adjusted taxable income without an exemption for depreciation, amortization, or depletion, thereby allowing more interest expense deductions.
The amendment benefits energy development businesses that are debt-financed and capital-intensive the most as it increases the amount of deductible interest expense and reduces tax in general.
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