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BP, Oil Spills, and Giving Up Tax Breaks

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BP's Tax Deductions from the Gulf Oil Spill

The Congressional Research Service issued a new report earlier this week titled Tax Deductible Expenses: The BP Case. You can find the text of the introduction below, or download a PDF of the full report here, courtesy of the Tax Prof Blog.

Following the release of BP’s second quarter earning statement, which showed a $10 billion reduction in tax liability for oil-spill-related cleanup and expenses, media headlines have generated public concern, and in some cases outrage, over these tax savings. Further, the ability of BP to realize these tax savings has generated a number of inquiries as to how and why BP is entitled to this reduction in tax liability.

BP’s reduction in tax liability is the result of standard business expense deductions and the general ability of taxpayers to claim refunds for previously paid taxes when realizing a net operating loss (NOL) or carrying the loss forward to offset future tax liabilities. Business expense deductions and NOLs play a significant role in enhancing economic efficiency by reducing business-cycle-induced fluctuations and spreading risk. BP has reportedly incurred, or expects to incur, $32 billion in cleanup-related costs and settlements over a multiyear period. Under current law, these costs can be used to offset business income and reduce tax liability. To the extent that these costs generate an NOL, these costs can be used to collect a refund for taxes paid in previous years or carried forward to offset tax liability in future years.

The $10 billion “credit” that appears on BP’s second quarter earnings statement is a financial account of BP’s anticipated tax savings associated with legitimate cleanup-related expenses. The figure does not reflect a tax credit as typically defined in the tax code. The $10 billion reduction in tax liability relates to a multiyear period, over which the $32 billion will be spent. The $32 billion was reported in 2010 for financial reporting purposes, but reflects cleanup spending costs in the current year as well as costs the company expects to incur in future years. The financial account and financial reports do not directly correspond to current year tax liabilities. Actual oilspill- related expenditures will be made over multiple years. Consequently, the associated tax savings will not be realized until the year expenditures are made.

BP's Maximum $18 Billion Spill Fine Likely to Be Lowered

As BP continues to work on cleanup efforts in the Gulf, the company now has to deal with massive civil penalties. Previous estimates put the potential fines at $17.6 billion, but now experts are predicting they may be able to negotiate a lower penalty.

According to Bloomberg.com, the fines could crimp the company’s ability to pay for cleanup costs, force it to sell more assets, and cut into future investment plans of incoming Chief Executive Officer Robert Dudley.

The Clean Water Act makes BP, as owner of the oil, liable for fines of $1,100 per barrel spilled even if it did nothing wrong, says Wayne State University law professor Noah Hall in Detroit. The penalty jumps to $4,300 per barrel if BP was grossly negligent. Hall says gross negligence in a civil case would include making “conscious decisions” that increased the likelihood of an incident like the blowup while engaged in a risky business, such as deepwater drilling.

BP Chairman Carl-Henric Svanberg told Bloomberg Television on July 27 that the company doesn’t believe it will be found grossly negligent or determined to be the sole responsible party for the spill.

Continue reading at Bloomberg.com…

BP Oil Spill To Cost U.S. Taxpayer Almost $10 Billion

From Reuters.com:

Oil giant BP said it plans to offset the entire cost of its Gulf of Mexico oil spill against its tax bill, reducing future contributions to U.S. tax coffers by almost $10 billion.

BP took a pretax provision of $32.2 billion in its accounts for the period, for the cost of capping the well, cleaning up the spill, compensating victims and paying government fines.

However, the net impact on BP's bottom line will only be $22 billion, with the company recording a $10 billion tax credit, most of which will be borne by the U.S. taxpayer, a spokesman said.

BP's UK tax bill will also be reduced, BP added.

Analysts said BP could prompt more public and political anger in the United States by deducting all the costs, and especially the expected fines BP will face.

In 2006, Boeing Co decided to forego seeking a tax deduction for any of a $615 million settlement with the government in 2006 over ethics charges, under pressure from lawmakers.

IRS Provides Tax Help, Guidance to Gulf Oil Spill Victims

Over the weekend, the IRS published a new press release with guidance for individuals and businesses affected by the oil spill in the Gulf of Mexico and announced a number of new efforts to help affected taxpayers, including a special Gulf Coast Assistance Day on July 17.

“This is a very difficult time for many people affected by the oil spill in the Gulf of Mexico. As residents of the region cope with the evolving situation, I want to assure them that the IRS will be doing everything it can to provide tax help to those who need it,” IRS Commissioner Doug Shulman said. “We encourage anyone who has an issue with the IRS to contact us and explain their hardship, and we will work with them to find a solution. We’ll do everything we can under current law to help taxpayers.”

The guidance released today is based on current law, and it explains how recipients of payments from BP should treat the payments for tax purposes. According to the current law, BP payments for lost income are taxable in the same way that the wages or business income these payments are replacing would have been. The law treats compensation for lost wages or income differently for tax purposes than compensation for physical injuries or property loss, which generally are nontaxable.

Every person can have unique financial circumstances, so the IRS encourages taxpayers to review their tax situation or talk with their tax preparers about the implications of payments or compensation from the oil spill.

The new information is available in a question-and-answer format on a special section of the IRS website, IRS.gov. The IRS is closely monitoring the situation in the Gulf, and additional information will be added to IRS.gov as it becomes available.

Are BP payments taxable income?

Many people on the Gulf Coast affected by the oil spill are filing claims through the BP oil company and they want to know, “Will the BP payments be taxable income?” This great question came up on the Don’tMessWithTaxes blog, and the answer to the question is: Yes, the payments will probably be taxable, but you never know, maybe not. Basically, the BP payments are considered payments made to individuals in the form of compensation for lost wages that would have otherwise been taxable income. Therefore, taxable. But sometimes people will get special tax treatment if they’ve been affected by disasters. Remember my blog about tax relief to flood victims?

Kenneth Feinberg, head of the Independent Claims Facility, said last week that it hasn't been determined if the payouts will be considered taxable income. Remember, this isn’t a gift from BP, it’s been given to cover money lost for jobs that couldn’t be done. The Treasury would lose a lot of revenue from these checks.

The recommendation is always set aside money for the IRS until you are certain it will not be taxable, just to be safe.

New Drill Ban as Oil Still Spews

BP is facing a slew of lawsuits and a criminal investigation as oil still gushes from their ruptured well in the Gulf of Mexico. Top Obama administration officials are also telling lawmakers in Washington that initial findings are showing definite “reckless conduct” leading up to the initial April 20th explosion.

Reuters.com reports the latest lawsuit will most likely be by investors, specifically the New York State pension fund—these investors are angry about the drop of the BP stock price. All the while, scientists estimate the oil leak is spewing up to 60,000 barrels a day!

According to reuters.com, Interior Secretary Ken Salazar said he would soon issue a new ban on deepwater drilling off the U.S. coast that would be more flexible than the suspension overturned a day earlier by a federal judge. He would like the new ban to include: when the ban would end and that it might allow oil companies to drill in certain low-risk areas. However there was no word on when Salazar would reissue this ban.

Let me know your thoughts. Follow me on Twitter @ronideutch or find me on Facebook.

BP to Set Up $20 Billion Cleanup Fund

From MSNMoney.com:

Stocks ended the day basically flat after BP (BP) agreed to put $20 billion into an escrow account to pay claims related to the Gulf of Mexico oil spill.

The commitment came with a BP decision to suspend its dividend for the rest of 2010, saving about $5 billion. BP shares rallied on the news and were up 1.4% to $31.85 in New York.

The announcement came after President Barack Obama met with BP Chairman Carl-Henric Svanberg and CEO Tony Hayward at the White House today to discuss the spill.

After the meeting with the president, Svanberg apologized "to the American people" for the disaster and said that BP would "look after the people affected, and we will repair the damage to this region and the economy."

BP's cleanup fund will be independently run by Ken Feinberg, the mediator who oversaw the Sept. 11, 2001, victims' compensation fund, news reports said. The $20 billion does not represent a cap for BP. The company and the administration were negotiating final terms.

BP also agreed to set aside $100 million to compensate oil field workers who have been idled by the moratorium on deepwater drilling.

134-year-old oyster company stops shucking

Whether you like them, sautéd, fried, barbequed, or the traditional half shell—If you like oysters, you’ll be sad to learn they may start to be in short supply due to the BP oil spill. According to CNNmoney.com, 67% of the nation’s total production of oysters comes from the Gulf region—Oyster shucking is big business in the Gulf area. However, due to the oil spill, one Oyster shucking company had to close up shop recently. It’s very sad, because P & J Oyster of New Orleans, Louisiana had been in business for 134 years! The problem? There simply aren’t any oysters to shuck when the waters are filled with oil. There is a lot that is unknown regarding the spill and how the market will react. With the spill and the length of time oysters take to grow to full size to be harvested, the next spawning season is in jeopardy. The president and co-owner, Al Sunseri , doesn't know what is next for his oyster business. He states that it takes oysters between 18 and 24 months to grow to full size to be harvested, and the next spawning season is in jeopardy. "There is a lot of unknown and it has everything to do with so much that we have never seen happen before."

Read the article here and tell me your thoughts.

BP's Open Wallet

After BP announced they had spent more than $1 billion on efforts related to gulf oil spill, many Americans have begun asking where all that money has gone. To help confused consumers CNN Money has put together a slideshow describing how BP has spent their $1 billion. Check out the full article and accompanying slides here.

Local advertising campaigns

Gulf States are doing all they can to bolster their tourism industries, which have been hammered by the oil spill -- and BP is footing the bill.

In Panama City, Fla., for example, the tourism development board is getting about $1.1 million from BP to spend on television and digital billboard advertising to assure the public that its local beaches remain pristine.

"The campaign's focus is on getting the word out that the Panama City beach hasn't been impacted by the oil spill, that our beaches are clean and the water is clear," said Dan Rowe, president and CEO of Panama City Beach Convention and Visitors Bureau.

Rowe said that the Bureau requested $2.2 million, but has so far received half. The remaining distribution hinges on the other clean-up needs of the state.

Stocks gain as confidence rebounds

The stock market has been a concern for many lately; especially when it comes to retirement nest eggs. You might rest easier tonight knowing that the stock market is doing better today than its intimidating dip yesterday. According to CNNMoney.com, markets were up for U.S. stocks led by a rebounding energy sector. The Dow Jones rose 225.5 points, or 2.3%, the S&P 500 index added 28 points (2.6%) and the Nasdaq is up 59 points, also 2.6%.

It seems the markets are being “driven by minute-to-minute reporting” of the news. Many people bailed out of BP stock yesterday upon hearing there would be a criminal investigation of the Gulf of Mexico oil spill and the latest attempt to plug the spill failed. Yet, as many lumped together all of the oil companies, it was realized BP made a mistake but not all oil is a bad investment.

Technology shares also increased as people realized their value. The National Association of Realtors said its pending home index which measures existing home sales, rose 6% in April when it was only expected to rise by 4.3%. General Motors and Ford Motor both posted large increases in May sales of their brands, as well as Toyota, only less.

In world markets, Japan’s index slid 1.1% after the nation’s prime minister resigned. Hong Kong’s Hang Seng index fell even lower. In the meantime, the euro rose against the dollar at $1.2247, bouncing back from the four-year low it had yesterday. Treasury bond prices are also lower. Sleep well U.S. investors, even if only for a night.

You can read the full article on CNNMoney.com here. If you are an investor or interested in investing, let me know what you think of this blog.

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Obama Calls for Rolling Back Oil 'Tax Breaks'

As the now well-known BP leak continues to spew oil into the Gulf of Mexico, President Obama has announced that it is time to begin reducing tax breaks for oil companies. According to this Washington Post story, the White House hopes to use the funds to develop and research clean energy sources.

Obama made the comments Wednesday in prepared remarks for a speech at Carnegie Mellon University in Pittsburgh.

He said the catastrophic Gulf oil spill shows the country must move toward clean energy by embracing energy efficiency, tapping natural gas and nuclear power and eliminating tax breaks for big oil.

Obama said that the Gulf spill "may prove to be a result of human error - or corporations taking dangerous shortcuts that compromised safety" - but that deepwater drilling is inherently risky and America cannot rely solely on fossil fuels.

The Fishermen and the Tax Man

From LA Times.com:

BP's request for tax records poses a problem for some residents of fishing communities in southeastern Louisiana — the nonconformists who haven't kept records or reported their cash income.

The first step for a commercial fisherman or coastal business seeking compensation for losses suffered in the oil spill seems simple enough: Submit copies of a commercial fishing license, proof of residence and tax statements.

But the request for tax records poses a serious challenge to some residents of close-knit fishing communities on the swampy edges of southeastern Louisiana, which for generations have harbored self-reliant nonconformists who don't pay much heed to everyday rules and regulations.

In other words, they often get paid in cash — and don't always report it.

"I worked for an uncle last year who paid me in cash," said a crab fisherman who asked to remain anonymous. "The BP guy wanted my tax statements, but how can I pay taxes if everything I earned was in cash?"

Many people involved in the seasonal harvesting of shrimp, crabs, oysters and fish — boat washers, fishermen, crab cookers, deckhands, dockworkers — said they felt caught by a pincer of environmental devastation and an assistance program that could expose them to the tax man.