IRS Instruction 8904 – IRS Forms, Instructions, Pubs 2026 – The IRS Form 8904, officially titled “Credit for Oil and Gas Production From Marginal Wells,” allows eligible taxpayers to claim a tax credit under section 45I of the Internal Revenue Code for producing oil or natural gas from marginal wells. This credit is designed to incentivize continued production from low-yield wells that might otherwise be uneconomical, helping to support domestic energy production. As we approach the 2025 tax filing season in 2026, understanding the latest instructions for Form 8904 is crucial for oil and gas producers, partnerships, and S corporations looking to reduce their federal tax liability.
In this comprehensive guide, we’ll break down what Form 8904 is, who qualifies, how to calculate the credit, filing requirements, and key updates for the 2025 tax year. Whether you’re an independent operator or part of a larger energy firm, this article will help you navigate the marginal wells credit effectively.
What Is the Marginal Wells Production Credit?
The marginal wells production credit, also known as the section 45I credit, provides a financial incentive for producing crude oil or natural gas from qualifying marginal wells. Introduced to bolster energy independence, this credit is part of the general business credit under section 38 and can be claimed on Form 8904.
For the 2025 tax year (applicable to returns filed in 2026), the credit is available exclusively for qualified natural gas production due to phase-out rules affecting crude oil. The base credit rates are $3 per barrel for crude oil and $0.50 per 1,000 cubic feet (Mcf) for natural gas, but these are adjusted annually for inflation and reduced based on reference prices published by the IRS.
According to IRS Notice 2025-34, the reference price for natural gas in calendar year 2024 (which determines the 2025 credit) is $1.64 per Mcf, resulting in an adjusted credit of $0.79 per Mcf for qualified natural gas production. Crude oil production, however, receives no credit in 2025 because market prices have triggered a full phase-out.
This credit can be carried back up to 5 years or carried forward up to 20 years if it exceeds your tax liability in the current year, offering flexibility for taxpayers in volatile energy markets.
Who Qualifies for the Section 45I Credit?
To claim the credit on Form 8904, you must meet specific eligibility criteria:
- Qualified Marginal Well: The well must be domestic and produce oil or gas classified as marginal under section 613A(c)(6). This includes wells with average daily production of no more than 25 barrel-of-oil equivalents, where water makes up at least 95% of the total effluent.
- Operating Interest: The credit is available only to taxpayers who hold an operating interest in the well. If multiple owners are involved and production exceeds limits, the credit is allocated based on revenue interest ratios.
- Production Limits: Qualified production per well is capped at 1,095 barrels or barrel-of-oil equivalents annually (prorated for short tax years or non-productive days).
- Exclusions: Production eligible for the section 45K nonconventional source fuel credit cannot qualify unless you elect not to claim the 45K credit for that well.
Partnerships and S corporations are required to file Form 8904 to claim the credit, while individual taxpayers, C corporations, estates, and trusts can report it directly on Form 3800 if the credit originates solely from pass-through entities like partnerships or S corps.
If you’re unsure about your well’s qualification, consult the definitions in section 613A(e) for crude oil, natural gas, and barrel measurements.
How to Calculate the Marginal Wells Credit?
Calculating the credit involves several steps outlined in the IRS instructions for Form 8904:
- Determine Qualified Production: Calculate the barrels or Mcf of oil/gas produced from marginal wells, ensuring it doesn’t exceed the 1,095 limit per well.
- Apply the Credit Rate: For 2025, use $0.79 per Mcf for natural gas (lines 1-3 on Form 8904). Lines 4-6 are reserved for future use, reflecting the oil phase-out.
- Add Pass-Through Credits: On line 7, include credits from Schedule K-1 (Form 1065 or 1120-S) using code P.
- Total the Credit: Sum lines 3 and 7 to get your total credit on line 8, which flows to Form 3800, Part III, line 1bb.
The inflation adjustment factor for 2025 is 1.5821, which, combined with the $1.64 reference price, yields the $0.79 per Mcf rate. Always check the latest Internal Revenue Bulletin for annual adjustments.
Filing Requirements for Form 8904
- When to File: Attach Form 8904 to your tax return for the year in which the qualified production occurs. Claims can be made on original or amended returns within 3 years of the original due date.
- Where to Report: Partnerships and S corps report the credit on Form 8904 and allocate it to partners/shareholders via Schedule K-1. Other taxpayers skip Form 8904 if credits are pass-through and report directly on Form 3800.
- Recordkeeping: Maintain records of production volumes, well qualifications, and operating interests to substantiate your claim.
The estimated time for completing Form 8904 includes about 1 hour 54 minutes for recordkeeping, 30 minutes for learning the form, and 33 minutes for preparation, per the Paperwork Reduction Act notice.
Key Updates for the 2025 Tax Year
For tax years beginning in 2025, the marginal wells credit is limited to natural gas production, with no credit available for crude oil due to elevated market prices triggering phase-out. The IRS released Notice 2025-34 in Internal Revenue Bulletin 2025-27, confirming the $0.79 per Mcf credit rate.
This represents a slight increase from prior years, driven by a decline in natural gas prices in 2024, making the credit more valuable for eligible producers. Stay updated via IRS.gov/Form8904 for any legislative changes or future developments.
Maximizing Your Marginal Wells Credit
To optimize your claim, consider consulting a tax professional specializing in energy credits. Tools like production tracking software can help ensure accurate reporting, and exploring carryback/carryforward options can enhance tax planning in fluctuating markets.
By leveraging the section 45I credit through Form 8904, marginal well operators can offset costs and sustain operations, contributing to U.S. energy security. For the most current information, visit the official IRS pages on Form 8904 and its instructions.