Operators of marginal oil and gas wells continue to face narrow margins and fluctuating market conditions. To provide relief in lower price environments, the IRS offers the marginal well tax credit under Internal Revenue Code § 45I. Recent guidance establishes the applicable rates for the 2025 tax year, presenting an opportunity for certain producers to reduce their federal tax liability.
Credit Structure and Eligibility
The marginal well tax credit applies only to wells that meet specific production criteria:
- The well qualifies as a marginal property under IRC § 613A(c)(6), producing no more than an average of 15 barrels of oil equivalent (BOE) per day; or
- The well produces no more than 25 BOE per day with a water content of at least 95% of total well effluent.
The credit is limited to the first 1,095 barrels (or barrel-of-oil equivalents) produced annually from a qualified well. This limit is prorated for partial-year production or short tax years.
Credit Amounts for 2025
The base credit is $0.50 per 1,000 cubic feet (Mcf) of natural gas and $3 per barrel of crude oil. These amounts are adjusted annually for inflation and may be reduced or phased out if market prices exceed established thresholds.
For tax years beginning in 2025:
- The IRS has set the reference price for natural gas at $1.64 per Mcf, below the phase-out range.
- As a result, the full inflation-adjusted credit of $0.79 per Mcf applies for qualifying natural gas production.
- Due to current oil market prices, the credit does not apply to crude oil production in 2025.
Claiming the Marginal Well Tax Credit
Taxpayers holding an operating interest in a qualifying well may claim the marginal well tax credit. The credit is allocated among all parties with an operating interest based on revenue share. Working interest owners, operators, and certain investors may be eligible, provided production thresholds are met.
The credit is claimed as part of the general business credit using Form 8904 (Credit for Oil and Gas Production From Marginal Wells) and carried to Form 3800 (General Business Credit). Partnerships and S corporations must pass the credit through to partners or shareholders.
If the credit exceeds tax liability, unused amounts may be carried back five years or forward up to 20 years, allowing flexibility in applying the benefit. Taxpayers cannot claim both the § 45I marginal well credit and the § 45K nonconventional fuel credit for the same production.
Practical Considerations
The 2025 natural gas credit of $0.79 per Mcf offers a meaningful offset for producers operating in lower-price environments. Accurate recordkeeping is critical. Operators should maintain:
- Daily production data to confirm BOE thresholds
- Documentation supporting ownership and operating interests
- Well classification and supporting technical records
Because eligibility is closely scrutinized, proactive compliance measures will help safeguard the credit and withstand potential IRS review.
Determine Eligibility for Valuable Tax Relief
The marginal well tax credit can provide valuable tax relief for qualifying producers in 2025. For more information, visit the IRS website. To determine whether your operations are eligible and how to best apply the credit in your broader tax strategy, contact Hall, Kistler’s Oil and Gas team by calling 330-453-7633 or using our online contact form.
