Overview of the Section 29 Tax Credit

Section 29 of the Internal Revenue Code authorizes an income tax credit for producing fuel from a non-conventional source. The amount of credit allowed in a given year is based on the amount of qualified fuel produced in that year.

Because many non-conventional fuel producers can not utilize the full value of their tax credits, they have structured themselves so they have the ability to transfer these credits to other parties.

One such arrangement is the direct purchase of the tax credits from the source of production. This is apportioned with respect to allocated interests in the tax credits derived from the production of gas. Under this arrangement, each ownership interest is allocated tax credits according to their participation of the gas produced and the associated tax credits for that year. These tax credits are then entered directly on line 50 of the investor's  form 1040, as described in the form 1040 instructions.

Another strategy has been the royalty trust, where each member of the trust acquires a non-operating net profit interest in the property. Tax credits available for fuel produced on the property are then allocated to the members in proportion to their interest in the royalty trust. There are currently eight publicly-traded oil and gas royalty trusts that pass non-conventional fuels tax credits to investors.

Finally, it is now possible to purchase only the tax credits needed on a yearly basis (customized to each individual's tax credit needs). This is possible due to the transferability of the credit which means the tax credit can be sold or ownership interest transferred to another person during the taxable year.

Section 29 of the Internal Revenue Code describes the following fuels as eligible for the tax credit:

• oil produced from shale,
• oil produced from tar sands,
• gas produced from geo-pressured brine,
• gas produced from Devonian shale,
• gas produced from coal seams,
• gas produced from a tight formation,
• gas produced from biomass, and
• liquid, gaseous, or solid fuels produced from coal.

Generally, in order to qualify for the credit, these fuels must be either produced from wells that were drilled after 1979 and before 1993, or produced in facilities placed in service during the same time period. Furthermore, the credit is allowed only on fuels that are sold prior to the year 2003. In other words, the number of fuel production properties that generate tax credits were established as of 1993, and they will only generate the credits for seven years.

However, several bills have passed each house in Congress, i.e., H.R. 4, H.R. 2511, H.R. 6, S 1547 and S 597, portions of this legislation will extend the tax credits till the year 2008 or 2011, depending on which bill one reads, also the Alternative Minimum Tax will be repealed for a number of immediate years.

Section 29 tax credits are applicable toward any and all income - active, passive, earned, unearned, pension and IRA with-drawls, dividends, trust income, stock options, capital gains estimated quarterly taxes, etc. all income from any legal source.

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