Finance

Understanding Severance Taxes For Financial Management  

Understanding Severance Taxes For Financial Management  

The severance tax is the tax on the extraction of natural resources. For example, the tax on oil and natural gas constitutes a tiny percentage of local and state general revenue. However, the rate may vary in places like Alaska, Wyoming, and North Dakota enriched with natural resources.

Recently, Pennsylvania’s senate has included a severance tax for the first time in their state budget.

Revenue From Severance Tax

Local and state governments raise severance tax services in the U.S.A, which is around $8.8 billion in revenue as per the 2017 data. It is a significant revenue source there. The maximum severance tax revenue is collected from Texas, followed by Montana, Oklahoma, New Mexico, and West Virginia.

States like Columbia and California have no severance tax. However, the Central Bureau records a small assessment fee that California levies on oil and natural gas produced there.

Severance tax services are more prevalent in Alaska, and it is hugely dependent on production. Around 5% of the general revenue is raised from severance tax.

Importance of Severance Tax

Severance tax helps determine whether a business is profitable or not. The taxation jurisdiction has its organic flow to calculate and assess the tax. The amount of tax is hugely dependent on state tax law and incentives offered by the states, a company’s operational facts, and the kind of resource being severed.

To calculate the severance tax, field operation, audits, accounting, and proper industry practices are mandatory. Severance tax services need taxpayers and governments to advise on refining rules and regulations and drafting.

Severance Tax Services Includes

● It provides training and development on requirements and reporting procedures.

● It helps manage the reporting process and compliance

● It performs refund reviews

Severance tax services provide appeal assistance and state tax audit

● It conducts voluntary disclosure agreements

Understanding Severance Tax In The U.S.A

The severance tax is imposed on non-renewable natural resources. It is mainly charged to resource producers or people working with loyalty. The tax is levied as per the volume or value of production. It is a way of compensating the states for the severance or loss of natural resources. A significant portion of the tax is to cover the extraction cost of these renewable resources.

Usually, the severance tax incentives are given in the form of credits. Tax rates are lowered where tax is burdensome. The severance tax is essential for it encourages the expansion and production of oil and natural gas operations. The royalty owners are charged with this form of tax even if there is no profit on their investment.

The state severance tax is also deducted against the federal corporate income tax liabilities. However, in the U.S.A, different states have different guidelines on the severance tax.

Final Takeaways

The severance tax is a minor portion of the overall state or local government’s revenue. Only the natural resource-rich conditions enjoy the benefits of this tax.

About the author

Sravani Reddy

I'm a breaking news reporter for crazy speed tech focusing on economic policy and capital markets. I completed my master’s degree in business and economic reporting at New York University.

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