Maximizing OBBBA Bonus Depreciation in Producing Oil and Gas Property Acquisitions

On January 16, 2026, Liskow tax attorneys published a blog regarding IRS Notice 2026 - 11, which provides guidance on the implementation of the amendment to Internal Revenue Code section 168(k) made by the One Big Beautiful Bill Act ("OBBBA") reinstating 100 percent expensing for certain qualified depreciable property acquired after January 19, 2025.  The Tax Cuts and Jobs Act of 2017 had amended section 168 to provide for 100 percent expensing for certain depreciable property, but the tax benefit of that amendment began to phase out 20 percent per year beginning for property placed in service after December 31, 2022, with total phaseout for depreciable property purchased after December 31, 2026. Among other things, IRS Notice 2026 - 11 provides interim guidance on how the IRS intends to determine the property acquisition date for purposes of new section 168(k) until proposed Treasury regulations are issued. 

Included in the depreciable property subject to 100 percent expensing is oil and gas lease and well equipment, gathering lines and gas processing plant and equipment (collectively, "Oil and Gas Equipment") acquired from a party who is unrelated to the purchaser and that has not been used by the purchaser prior to the acquisition. Assuming that the purchaser expects to incur a federal income tax liability for the year of acquisition, the purchaser of a producing oil and gas property can use 100 percent expensing to reduce that tax liability and increase cash flow from the acquisition through proper drafting of the oil and gas property purchase and sale agreement ("PSA"). 

The PSA first needs to allocate the total consideration for the purchase among the oil and gas properties subject to the PSA. This typically is done through the “Allocated Values” schedule included in most PSAs. This schedule, while key for federal tax purposes, is also used in determining the reduction in purchase price should one or more oil and gas properties drop out of the transaction due to title or environmental issues, casualty loss or the exercise of a preferential right to purchase held by a party other than the purchaser.  

The PSA, either on the Allocated Values schedule or on another tax schedule, should further break down the allocated value of each oil and gas property between depreciable Oil and Gas Equipment and depletable oil and gas reserves. The purchaser should consider negotiating for an allocation to Oil and Gas Equipment that is the highest value that can be supported by data in the market. Further, the PSA should contain a provision that the agreed consideration allocated to Oil and Gas Equipment represents the fair market value of the Oil and Gas Equipment. Finally, the PSA should contain a provision requiring the parties to each report the agreed fair market value of the Oil and Gas Equipment on IRS Form 8594. With these steps, the consideration allocated to Oil and Gas Equipment in the PSA should be the amount subject to 100 percent expensing on the purchaser's federal income tax return for the taxable year of the oil and gas property acquisition. 

For more information regarding this topic, reach out to Liskow attorney John Bradford, and visit Liskow's Tax practice page.