On May 18, 2020, the Internal Revenue Service (IRS) issued Notice 2020-34 that establishes the Marginal Well Credit (MWC) for 2019 of $0.08 per MCF. This credit is available for working interest owners (not royalty) based on marginal gas production during 2019. The credit is available to reduce regular tax to the extent it exceeds the alternative minimum tax (AMT) liability. Unused credit can be carried back five years and can be carried forward.
The amount of credit is determined based on the prior year national average wellhead price for natural gas. The notice provides that the average price of gas at the wellhead for 2018 was $2.55. Based on that price and the inflation factors, the MWC was determined to be 8 cents per MCF of natural gas in 2019. Although the original calculation of national average wellhead price of gas for 2015 was ostensibly calculated based on available data, this notice relies on the Producer Price Index for All Commodities (PPIACO) published by the Bureau of Labor Statistics to calculate the average wellhead price of gas. The IRS intends to use this methodology for the 2020 credit based on 2019 average prices.