The natural resources sector -- including minerals, quarried stone, coal, natural gas, and more -- is just one of many Pennsylvania industries affected by the Tax Cuts and Jobs Act. To discuss the tax law’s impacts, we spoke with Edward A. Kollar, CPA, EA, CSEP, firm director with Baker Tilly Virchow Krause LLP in Wilkes-Barre and author of the winter 2019 Pennsylvania CPA Journal feature “TCJA: Mining the Tax Benefits for Natural Resources Holders.”
By: Bill Hayes, Pennsylvania CPA Journal Managing Editor
One of the many Pennsylvania industries affected by the Tax Cuts and Jobs Act is natural resources, including minerals, coal, stone, and natural gas. To discuss the impacts, today we are with Edward A. Kollar, CPA, EA, CSEP, firm director for Baker Tilly Virchow Krause LLP in Wilkes-Barre and author of “TCJA: Mining the Tax Benefits for Natural Resources Holders,” a feature from the upcoming winter 2019 Pennsylvania CPA Journal.
Just to give people some context, when we talk about natural resources in Pennsylvania what industries are we talking about? What sort of impact do they have on the Pennsylvania economy?
[Kollar] Obviously the big one the is the natural gas. With natural gas, just with the water-holing, how that is developed in there, there's been a lot of economic development there. Pennsylvania has timber. Obviously, it's been known for the coal. Pennsylvania is, I think, the only anthracite region in the US but it has the anthracite and bituminous coal. When I was looking at this, U.S. Department of Interior Office of Mining and Reclamation has Pennsylvania down as having 27 different minerals that are mined in the state.
Obviously, that's quite a bit, I thought. I didn't think there would be that many. Like I said, the big one, the coal bluestone. Bluestone and flagstone are two big ones up in northeastern Pennsylvania, Susquehanna counties. Other bluestone is a very big, big item that's mined here.
Before we dive into some particulars, what sort of impact would you say the Tax Cuts and Jobs Act has on natural resources in general? Is this a sea change as far as what they have typically done? Or more like some new trouble spots to watch?
[Kollar] I think it's going to depend, I would probably say it's a sea change overall. Just about every business has been hit by it in some way, shape, or form. Considering that this is the biggest change in 30 years, since the 1986 Reform Act, you have to get hit by it in some way, shape, or form. I definitely would say it's a sea change.
How does the change of the tax for C corporations affect companies in this area?
[Kollar] That's a big one. You figure it's a 14% reduction from having a max of 35%, going down to 21%. Most C corporations, unless they were not very profitable at all, are going to see some kind of benefit. Some of the ones that I've looked at that had billions of dollars of income, there's a $140,000 worth of tax savings right off the bat. That's another piece of equipment whether it's some kind of mining equipment or trucks, whichever the situation may be.
And how about the elimination of the alternative minimum tax? What might the impact be there?
[Kollar] That also is going to be a tax savings. The big item with a lot of the miners was that percentage depletion was a tax preference item. The percentage on that ranged from between five and 15% for percentage depletion items depending on the mineral. Now that that's been eliminated, there's an additional tax savings. It's obviously going to be affecting the C corporations.
A lot of the companies dealing in natural resources are smaller companies so how does this status, being a small or a large company, alter the impact of the Tax Cuts and Jobs Act?
[Kollar] Well, one of the provisions in the TCJA was the simplification for accounting methods and many of your small companies don't have sophisticated accounting systems. Many times they're using family members to help them along. They don't have to worry about section 263A. In fact, they don't have to account for it. They don't have to account for inventories. That's going to help them quite a bit as far as their accounting. Again, many of them operate on cash and the fact that it's cash basis. This helps them. Simplifies their accounting.
What's taking place in the area of the DPA deduction? In the past, that's been a valuable deduction for companies in these industries. What's the deal there?
[Kollar] Okay, the DPAD has been eliminated but in its place what the IRS came up with was section 199A. That could be up to a 20% reduction in income for certain business operations. Interesting, it's sort of complicated in the fact that the IRS says that calculations for it could range from 30 minutes to 20 hours as far as an estimate. For most operators, in whether they do bluestone or timber or some of these other industries, it's going to end up being a 20% reduction of their taxable income from the operation. Of course, there's certain limitations but that's a good starting point.
We also have a change in the net operating loss deduction. What's the situation there?
[Kollar] Net operating loss is you used to be able to take them back two years or forward 20 years. That now has been changed in the fact that you only could take them forward and you're only allowed an 80% deduction in the following year. Basically you have to do a little bit of planning if you have a year with a large NOL, thinking, well, the next year might…that NOL will be able to wipe out all my income. You won't be able to use it. You still will have some tax there. You'll get 80% reduction, but you still will have some taxable income.
All in all, for CPAs with clients in the natural resources arena, how should they look at these changes and the opportunity it gives them to help clients? What can they do to sort of make this less complex for people?
I think the most important thing is know your clients and understand their needs. I think getting out in front of them. Explaining the benefits of the tax law. Laying out a course of action for them. Again, most of them, I think you're going to just have to be in front of them and operate with them and educate them as they're going by. What the benefits are. But take a look at not just one year. You may have to take a look at two, three, four years out, what's going to be happening with their business and how the new tax law is going to affect them.