New Tax Laws for Oil and Gas

In October of this year, President Bush signed the Emergency Economic Stabilization Act of 2008.  There are three divisions, the second division, Division B, is the Energy Improvement and Extension Act.

For the oil and gas industry, the 50% bonus depreciation election was extended for costs incurred when expanding a refinery’s capacity. 

The new act extends the suspension of the taxable income limit on percentage depletion for oil and natural gas produced from marginal properties for any taxable year (i)beginning after December 31, 1997 and before January 1,2008 or (ii) beginning after December 31, 2008 and before January 1, 2010.    Go ahead, read those dates again…they are a bit confusing.  This means the suspension applies to 2009, but not to 2008!  In the past, a well producing at a marginal rate could not take percentage depletion,  but for 2008 and 2008 only, it can. 

Under the new law, section 199 domestic production activities deductions are capped to 6% in tax years beginning after December 31, 2009, while the allowable deduction for other types of qualifying income will increase from 6% to 9%.  This limit applies to “oil-related qualified production activities income (QPAI)”, which includes income from the production, refining, processing and transportation or distribution of oil and gas.  This cap is expected to raise  $4.9 billion over the next 10 years.

 Beginning in 2009, the act tightens the rules for oil and gas companies to pay taxes on overseas income.  It extends the special foreign tax credit limitation for taxes attributable to income defined as foreign oil and gas extraction income (FOGEI) to income defined as foreign oil-related income (FORI).  It now includes certain transportation and refining activities that were not previously included.  This provision is expected to raise $2.2 over the next 10 years.

As the economy continues to be volatile, I am sure the government will implement more new laws in response, and we must continue to keep a lookout for those that affect the industry we work in!