What is the marginal well credit?
Gas credit available for 2026; oil credit phased out
IRC §45I provides a production credit for oil and gas from qualified marginal wells that phases out as reference prices rise. For tax years beginning in 2026, Notice 2026-42 sets the natural gas credit at $0.81 per Mcf. Based on the 2025 oil reference price of $63.40, the oil credit is fully phased out. Only holders of an operating interest may claim it, on up to 1,095 barrels or equivalent per well.
Reviewed by Ebot Mbi, CPA, EA · Last reviewed · Law and figures current as of September 17, 2026
Key takeaways
- The statutory amounts are $3 per barrel of oil and 50 cents per Mcf of gas, adjusted for inflation.
- The credit phases out when the prior year's reference price exceeds inflation-adjusted thresholds.
- For 2026, the gas credit is $0.81 per Mcf; the oil credit is $0 because oil prices are well above the phase-out range.
- Production above 1,095 barrels, or barrel-of-oil equivalents, per well per year does not qualify.
- The credit is part of the general business credit and can be carried back five years.
What it is
Marginal wells produce small volumes and can become uneconomic when prices fall. The marginal well credit supports production from these wells in low-price years. Because the credit is tied to prices, it can be zero in one year and available in another, and the oil and gas components are determined separately.
The IRS publishes the reference prices and resulting gas credit amount each year.
The credit is separate from percentage depletion for marginal properties under §613A(c)(6), which uses the oil reference price to set a possibly higher depletion rate. Both depend on annual IRS publications, but they are computed differently.
What the law says
IRC §45I(a) sets the credit equal to the credit amount times qualified production. Under §45I(b), the credit amount is $3 per barrel of qualified crude oil production and 50 cents per 1,000 cubic feet of qualified natural gas production, adjusted for inflation. The credit is reduced ratably as the prior year's reference price rises above $15 per barrel for oil or $1.67 per Mcf for gas, with those thresholds also adjusted for inflation, and is fully phased out $3 per barrel, or 33 cents per Mcf, above them.
For tax years beginning in 2026, Notice 2026-42 sets the 2025 natural gas reference price at $2.20 per Mcf, below the $2.72 inflation-adjusted threshold, and the credit amount at $0.81 per Mcf. Notice 2026-30 sets the 2025 oil reference price at $63.40 per barrel, which is far above the inflation-adjusted oil phase-out range, so the oil credit is $0 for 2026. Section 45I(c)(2)(A) limits qualifying production to 1,095 barrels or barrel-of-oil equivalents per well per year, and §45I(d)(2) allows the credit only for production attributable to an operating interest.
Requirements and tests
To claim the credit:
- The well must be a qualified marginal well under §45I(c)(3): a domestic well whose production is marginal production under §613A(c)(6), such as from a stripper well property, or whose average daily production is no more than 25 barrel-of-oil equivalents with water making up at least 95% of total well effluent.
- You must hold an operating interest; royalty and net profits interests do not qualify.
- Only production up to 1,095 barrels or barrel-of-oil equivalents per well per year counts, with 6,000 cubic feet of gas treated as one barrel.
- Production eligible for the §45K nonconventional source credit cannot also be used for this credit.
- The credit is claimed on Form 8904 and is part of the general business credit.
How it works
For each qualified well, multiply qualifying gas production by the year's gas credit amount, and qualifying oil production by the oil credit amount, which is $0 for 2026. The total becomes part of the general business credit on Form 3800, subject to the tax liability limits. Under §39(a)(4), unused marginal well credits can be carried back up to five years.
Because the amounts depend on the prior year's prices, check the IRS notice for each year before claiming the credit.
If more than one person holds operating interests in a well, the credit is allocated among them based on their shares of the production. The per-well production cap is applied to the well as a whole, then shared.
Keep production records by well, the IRS notice for the year, and documentation that each well meets the marginal well definition. Wells can move in and out of qualification as production changes.
Assumptions: Tax year 2026; the taxpayer holds a 100% operating interest in one qualified marginal gas well.; 2026 production: 6,500 Mcf, which is below the 6,570 Mcf equivalent of 1,095 barrels.; Credit amount for 2026: $0.81 per Mcf (Notice 2026-42); oil credit $0.; The taxpayer has enough tax liability to use the credit in 2026.
| Qualifying production | 6,500 Mcf |
|---|---|
| Gas credit (6,500 × $0.81) | $5,265 |
| Oil credit for 2026 | $0 |
| Total §45I credit | $5,265 |
The well generates a $5,265 credit for 2026, subject to the general business credit limits.
Illustration only; not a projection of your results.
Risks and IRS scrutiny
The IRS reviews whether wells meet the marginal definition, whether production volumes and the per-well cap were applied correctly, whether the claimant holds an operating interest, and whether the correct year's amount was used. Using an earlier year's rate or claiming the oil credit when it is phased out leads to disallowance and interest.
Because the credit is small per well and the rules change annually, errors often repeat across many wells and years. A yearly check of the notice and each well's status prevents that.
Who it is not for
The credit is not available to royalty owners or other non-operating interest holders, for oil production in 2026, or for wells that exceed the production limits.
How ebotCPA helps
We confirm which wells qualify, apply the per-well cap, use the current IRS amounts, and include the credit in your general business credit computation, including any carryback.
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.
Frequently asked questions
What is the marginal well credit for 2026?
$0.81 per Mcf of qualified natural gas production under Notice 2026-42; the oil credit is fully phased out.
Who can claim the marginal well credit?
Only holders of an operating interest, under IRC §45I(d)(2). Royalty owners cannot.
Is there a limit on production that qualifies?
Yes. Production above 1,095 barrels or barrel-of-oil equivalents per well per year does not qualify.
Can the marginal well credit be carried back?
Yes. IRC §39(a)(4) allows a five-year carryback.
Have facts like these?
Book a $497 Case Analysis to have Ebot Mbi, CPA, EA review your facts before you act.