ComboCurve: After Federal Income Tax Economics

ComboCurve: After Federal Income Tax Economics

AFIT Economics


Setup Overview

It is possible in ComboCurve to model AFIT Economics, or ‘After Federal Income Tax’. This article will walk you through the process along with all settings in ComboCurve that are tied to this regime. To enable AFIT Economics, proceed to General Options, and under the ‘Income Tax’ field, toggle to Yes. 


Multiple fields will appear when this setting is enabled, and are listed below:

15% Percentage Depletion - Select Yes if you are an independent oil and gas company with less than 1000 BOE/d production and want to use this depletion method.  CC looks at 15% of scenario gross revenue and 50% of scenario net revenue and uses the lesser per IRS stipulation.  Then, if there is also a cost depletion model applied to a CAPEX item, CC will use the greater depletion each month via either this model or a specific cost-based depletion model applied to a CAPEX case (more below).

Enable Carry Forward (NOL) - Default is ‘No’ to allow full deduction each year even when income is negative.  ‘Yes’ will enable Carry Forward (NOL) for future tax deduction.  This does not aggregate across properties but is on a well-by-well basis so that if DD&A is left over after the final period, it will be deducted at economic limit of the well.

State Income Tax - Applied as a percentage of taxable income determination. This is custom modelled for the entire scenario. This can be modelled on a flat basis, or with differing tax rates across calendar dates, months from First Prod Date, or months from As Of Dates of wells.

Federal Income Tax - Applied as a percentage of taxable income determination but after State Income Tax is deducted. This is custom modelled along with State Income Tax, and features the same modeling capabilities.

Reports

Along with the above listed fields, toggling on Income Tax allows for AFIT output columns to be selected and used in your economic runs. To utilize these columns, when ready hit ‘Run Scenario’ and find the ‘AFIT Economics’ collapsable list within the ‘Columns’ tab. This allows outputs such as Tax Credit, Depreciations, Depletions, Deductions, and AFIT cash flows at various discount rates to be modelled alongside standard BFIT outputs. AFIT yardsticks like ROI & IRR are also selectable for Oneline outputs. 


Along with the General AFIT settings, we also allow users to model tax recovery schemes for CAPEX over time through DD&A. To access this model creation window, proceed to the CAPEX model creation window (‘Choose CAPEX’), and then page over to ‘DD&A’, which is not accessible from the main Scenario screen as it only applied through being nested in the ‘DD&A’ column in CAPEX models. 


There are 3 main modeling strategies for types of investments in this window. For Expensed Investments that annex current production, such as a workover, are likely to be written off in the 1st year. For this investment you may either apply no DD&A model or apply a simple depreciation model with 100% applied to Year 1.

Capitalized investments that access new production, such as drilling, should receive a full depreciation model. Depreciated items can have separate schedules applied to tangible and intangible portions of the capital as defined in the CAPEX model. ComboCurve allows the users to populate common MACRS depreciation schedules as well as modify them to fit more specific needs. 

Depreciation model types:
  1. MACRS 3, 5, 7, 10, 15, 20 Year schedules are available for pre-filled percentages in one extra increment (i.e. 7-year = 8 periods) due to the "half-year convention" which starts the schedule on July 1 of the first year of deduction.  MACRS 7-Year is most common in oil and gas applications. (Note: MACRS = Modified Accelerated Cost Recovery System)
  2. Custom allows entry of your own schedule with any number of rows.  If selecting this option, enter the schedule into the ‘Depreciation’ window below on the same page. Ensure the total Cumulative percentages for Tangible and Intangible each always add up to 100%


  1. % Tangible Fed Tax Credit - Immediate tax credit (CAPEX times credit %).  This is independent of any other deduction (applied "on the top")
  2. Bonus Depreciation information is in the Appendix of the model, as recent changes have introduced more details.
Depletable items such as initial purchase price and leasehold capital can be deducted against income for taxation by multiple methods. It is important to note that Tangible items are never depleted, but ComboCurve allows you to make these selections for modeling purposes. Whenever there is a depletion model conflicting with the 15% depletion setting selected in General Options, the greater of the applied methods will be used in CC calculations. Depletion model details are listed below:
  1. % Tangible or % Intangible Immediate Deduction - Amount of CAPEX to take as a depletion deduction at spend date.  Any remaining amount will be deducted via the method below.
  2. Cost Depletion Model (Split out for Tangible vs Intangible):
    1. UOP (Major Phase) – Units of Production which is the current monthly production of the major phase divided by EUR times the running balance of the basis. 
      1. How is major phase determined? First we look to the ‘Primary Product’ header in CC. If unpopulated, we default to OIL, unless an oil 
    2. UOP (BOE) – Current monthly production of the well using BOE factors in General Options divided by EUR times running balance of the basis. 
    3. Deduct at Econ Limit - For items that can’t be written off until P&A, sale, etc.
    4. No Depletion
    5. Expense at FPD – Deduct 100% of the entire amount in the year the expenditure is made. 

Like a standard economic model, when finished setting up a DD&A model, make sure to give it a name, and ‘Save As’ to save it to the project. Once saved, proceed back to the CAPEX model screen, and the saved model will be selectable in the DD&A column.




Appendix: Bonus Depreciation + TCJA/OBBBA

For bonus depreciation - In addition to any normal depreciation schedule percentages below, take a percentage of the total as a time-0 deduction. 

Note: The remaining scheduled factors should still add up to 100% as they are percentages of the remaining AFTER Bonus Depreciation methods.

TCJA Bonus Depreciation - Default "No" will allow only manual Bonus Depr entry.  "Yes" applies Bonus Depr from this Tax Cuts and Jobs Act schedule by investment year:
  1. 2010-2011: 100%
  2. 2012-2017: 50%
  3. 2018-2022: 100%
  4. 2023: 80%
  5. 2024: 60%
  6. 2025: 40%
  7. 2026: 20%
  8. 2027+: 0%

Don't double-dip with manual Bonus entry.  TCJA is intended to be stand-alone, not double-dipped with manual Bonus Depr. entry.  The Pre-built Depr. Models are the % factors applied on the remaining amount after all bonuses.

OBBBA - The recently enacted One Big Beautiful Bill Act (OBBBA) has brought significant changes to bonus depreciation, effectively altering the landscape established by the Tax Cuts and Jobs Act (TCJA) of 2017. The OBBBA introduces significant changes to bonus depreciation, notably reinstating 100% bonus depreciation permanently for most qualified property acquired and placed in service after January 19, 2025. This reverses the phase-down schedule established by the TCJA. Qualified property generally includes new and used tangible personal property with a recovery period of 20 years or less, along with certain improvements to nonresidential real estate. For businesses, these changes offer significant tax advantages by allowing full deduction of eligible investments in the year they are placed in service. The permanence of 100% bonus depreciation also incentivizes businesses to invest in essential assets. Additionally, the OBBBA increases the maximum Section 179 deduction and phase-out threshold for properties placed in service after December 31, 2024. 

% Tangible Bonus Depreciation and % Intangible Bonus Depreciation - If TCJA is not used, allows manual selection of an immediate deduction.

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